Bank of Canada Holds Rates, Fearing the Soft Landing Runway Shrinks

26 Oct, 2023

Bank of Canada Holds Rates, Fearing the Soft Landing Runway Shrinks

Bank of Canada Governor Tiff Macklem has addressed concerns about the narrowing window for a soft landing in the country's economy. However, he emphasized that Canada is not on the brink of a severe recession, even if the current trend of moderating economic growth dips into negative territory in the upcoming quarters.

Macklem clarified the distinction, stating, "When people say the word recession, I think what they have in mind is a steep contraction in output and a large rise in employment. That's not what we're forecasting. We've been saying for some time that the path to a soft landing is narrow. And in this projection, that path has gotten narrower."

The central bank's latest projections anticipate economic growth of 1.2% for the current year, followed by 0.9% in 2024 and a more robust 2.5% in 2025. Despite the near-term challenges related to high oil prices and structural factors, such as a shortage of housing supply, Macklem remains optimistic about the economy's return to stronger growth by 2025. During this period, the central bank also foresees inflation returning to the target rate of two percent.

Macklem dispelled any comparison of the near-term economic outlook to "stagflation," a term coined for a period of high inflation combined with economic stagnation during the 1970s. He clarified that the current economic situation does not fit that description.

Canada's unemployment rate has maintained its historically low level of 5.5% since July, further reinforcing the country's economic stability.

The Bank of Canada is facing the delicate task of curbing inflation without triggering a recession, according to Brooke Thackray, a research analyst at Horizons ETF Management. Thackray suggests that Macklem may adopt a more dovish stance in the next meeting if the unemployment rate shows signs of increasing.

The global economy is currently experiencing a slowdown, and further moderation is anticipated as past policy rate hikes and the recent surge in global bond yields influence demand. The central bank acknowledges that previous interest rate increases have contributed to dampening economic activity and alleviating price pressures within Canada.

Nonetheless, the bank is concerned about the slow progress toward price stability and the increased risks of inflation. As a result, it stands ready to raise the policy rate further if necessary. The statement from the Bank of Canada highlights its focus on factors like core inflation, the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behavior.