Canada Mortgage and Housing Corp.’s chief economist is wary of ongoing Bank of Canada interest rate rises to control rampant inflation in the country.
The moderate scenario:
- a policy interest rate that reaches 2.5% by early 2023 and then stays at that level until the end of 2025.
- the high interest rate scenario
High interest rate scenario:
- more actions by the Bank of Canada are required to prevent excess demand from triggering spiralling prices and wages in response to higher inflation expectations
- In this scenario, the Bank of Canada hikes more aggressively and increases its policy interest rate to 3.5% in early 2023 before gradually converging back to the neutral rate of 2.5%. In both scenarios, inflation gets back to the 2% mark by the end of 2023.
- Economic growth hits a bottom between Q4 2022 and Q1 2023. These two quarters register marginal negative growth, signifying a mild recession in the high interest rate scenario.
But, it could get even worse:
- Monetary policy may need to tighten even more with rates staying high longer than in our high interest rate scenario to tame households’ and firms’ expectations and bring inflation back to the 2% target.
- In the worst-case scenario, this could result in stagflation.
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