Economy
Recession bets rise in Canada as sticky inflation points to higher rates
© Reuters. FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo/File Photo
By Fergal Smith and Steve Scherer
TORONTO (Reuters) – The Bank of Canada’s move to come off the sidelines after a five-month pause has sent a signal that some economic pain will be needed to tame stubborn inflation, leading investors to raise bets on a hard landing for the economy.
The central bank is worried that the Canadian economy is running too hot for inflation to return to its 2% target and that if it waits to act, inflation expectations could rise, making matters worse.
Immigration, a key source of strength for the economy, is growing at a record pace. But some other economic supports, such as pandemic-era savings, government spending and extending mortgage amortizations are likely to fade over the coming years, while an increasing share of home loans will renew at higher interest rates, analysts say.
That could mean the economy becomes more sensitive to increased borrowing costs just as consumers start to feel the effects of the Bank of Canada’s latest rate hikes. The central bank lifted its benchmark rate to a 22-year high of 4.75% this month and is expected to tighten further in July or September.
A hard landing for the economy, or a recession, could raise unemployment, something the BoC has been hoping to avoid. It could also lead to a reversal of rate hikes, perhaps as soon as next year.
“If central banks such as the Bank of Canada continue to raise rates at this pace, they risk tilting the economy into a recession and forcing themselves into an eventual embarrassing climb down,” said Karl Schamotta, chief market strategist at Corpay.
“Markets are convinced that this is the exact scenario that is playing out.”
The BoC is not the only central bank that has turned more hawkish in recent weeks, but yield curve inversion, which is usually seen as a predictor of recession, is even more pronounced in the Canadian bond market than in the United States.
The Canadian 10-year rate has fallen further below the 2-year this month to a gap of about 130 basis points, marking the deepest inversion in Refinitiv data going back to 1994.
“The question is not what is the economy doing now. The question is what will the headlines be reading 12 months from now,” said David Rosenberg, chief economist and strategist at Rosenberg Research.
“I’m not going to be betting against interest rates and I’m not going to be betting against policy lags.”
The BoC says it takes between six and eight quarters for rate hikes to sink in.
Data on Tuesday showed Canadian inflation easing to its slowest pace in two years, but underlying price pressures remained strong and the BoC has said that GDP could outrun its 1% growth projection for the second quarter, after rapid growth at the start of the year.
The data has left analysts pushing back their forecasts of a slowdown to later in 2023 or in 2024 but accompanied by higher than anticipated interest rates.
“What I think most economists would agree on is that the downside risks – the really severe downside risks – have increased in their likelihood of materializing,” said Royce Mendes, head of macro strategy at Desjardins.
© Reuters. Russian Central Bank Governor Elvira Nabiullina attends a news conference in Moscow, Russia June 14, 2019. REUTERS/Shamil Zhumatov/File Photo
MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.
The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.
Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.
“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.
Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.
“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.
The bank will next convene to set its benchmark rate on Feb. 16.
The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.
© Reuters. FILE PHOTO: Workers walk past an under-construction area with completed office towers in the background, in Shenzhen’s Qianhai new district, Guangdong province, China August 25, 2023. REUTERS/David Kirton/File Photo
SHANGHAI (Reuters) – China’s top planning body said on Saturday it had identified a second batch of public investment projects, including flood control and disaster relief programmes, under a bond issuance and investment plan announced in October to boost the economy.
With the latest tranche, China has now earmarked more than 800 billion yuan of its 1 trillion yuan ($140 billion) in additional government bond issuance in the fourth quarter, as it focuses on fiscal steps to shore up the flagging economy.
The National Development and Reform Commission (NDRC) said in a statement on Saturday it had identified 9,600 projects with planned investment of more than 560 billion yuan.
China’s economy, the world’s second largest, is struggling to regain its footing post-COVID-19 as policymakers grapple with tepid consumer demand, weak exports, falling foreign investment and a deepening real estate crisis.
The 1 trillion yuan in additional bond issuance will widen China’s 2023 budget deficit ratio to around 3.8 percent from 3 percent, the state-run Xinhua news agency has said.
“Construction of the projects will improve China’s flood control system, emergency response mechanism and disaster relief capabilities, and better protect people’s lives and property, so it is very significant,” the NDRC said.
The agency said it will coordinate with other government bodies to make sure that funds are allocated speedily for investment and that high standards of quality are maintained in project construction.
($1 = 7.1315 renminbi)
© Reuters. Russian Central Bank Governor Elvira Nabiullina attends a news conference in Moscow, Russia June 14, 2019. REUTERS/Shamil Zhumatov/File Photo
MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.
The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.
Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.
“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.
Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.
“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.
The bank will next convene to set its benchmark rate on Feb. 16.
The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.
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