Huge rate hike causes doubts concerning BoC’s optimistic view

The central bank Governor Tiff Macklem’s largest rate hike in many years still hasn’t weakened his optimism about the nation’s outlook.

While he surprised everyone by raising the Bank’s key lending rate by 1% to 2.5%, Macklem tried to support his hawkish tone on inflation with a soft-landing forecast for Canada.

However, economists believe it won’t be easy to fulfil.

Such a scenario assumes that the rate-hike cycle will be short-term, the rates will hardly move towards restrictive territory, and the mix of high inflation and a weak real estate market will not affect consumer spending significantly. The Bank of Canada keeps expecting the national economy to grow by 1.8% in 2023 and by 2.4% in 2024, which is a Goldilocks scenario.

The optimistic forecast comes with a big risk, as wrong expectation on economic growth will cause another hit at the BoC’s credibility, which is already questioned after fiasco with predicting inflation.

“A soft landing in this case sounds like trying to parallel park a car at 60 miles an hour,” – Mark Wiseman, chair of Alberta Investment Management Corp., noted. “You need to be not just a skilled driver, you need to be an extremely skilled driver and also lucky.”

“With the extremely aggressive rate increase, more hikes expected, and the record high inflation, a soft landing for the Canadian economy may not be reached,” – Benjamin Reitzes from Bank of Montreal says.

“While technically recession is not the base scenario, I do see a 50% chance of it. We have a lot of downside risk in terms of the real estate market,” – noted Citigroup economist Veronica Clark, who now expects the BoC to raise its overnight rate to 4%.