The Bank of Canada will be “playing with fire” in case of more than three rate increases

Although Bay Street is predicting  seven interest rates hikes from the central bank in 2022, one influential economist doesn’t share this opinion, expecting not more than three hikes.

According to Bloomberg, investors are expecting the Bank of Canada to act aggressively in attempt to restrain inflation, which has reached a 30-years record of 5.1% in January, pushed by the gasoline, food and shelter prices.

Nevertheless, David Rosenberg, chief economist and strategist at Rosenberg Research & Associates, says the BoC will be “playing with fire” in case it decides to raise its key lending rate more than a few times and risk inverting the yield curve. Such a change will be a warning about an economic contraction.

“There will be other economists, the BoC and the U.S. Federal Reserve, who will find ways to ignore the yield curve even though its predictive power is only 100% in the post-World War II period when it comes to predicting recessions,” – he noted on Wednesday.

Rosenberg believes most of the consumer price growth during the previous year has been caused by supply-chain issues. That’s why the central bank won’t have to raise rates as much as investors think in order to bring inflation back into its 1-3% target limits.

“In my opinion, inflation in the second half of 2022 will go down more rapidly than the typical research reports on Bay Street or Wall Street show. And we’ve studied the topic. It would be ridiculous for the BoC to act overly aggressive,” – he added.

“They’ll raise rates two or three times and then take pause. I really believe this is how this cycle will end.”

With the supply-chain issues in the food industry and restrained oil production from OPEC, Rosenberg is “not surprised” at the pace of inflation. However, he says as soon as the pandemic subsides, those price pressures should ease. “It’s only a matter of time.”

“There’s no point in hitting the economy because of inflation,” – he noted.

“Maybe behind closed doors, the central bank thinks we need to generate a demand contraction to deal with this inflation given how inelastic the supply curve is. It’s scary to even think about a possibility of such a massive policy mistake, but the yield curve is showing that there’s no need for the Bank to act aggressively right now,” – he said.