A soft landing? More like a crash landing, say economists, who warn Bank of Canada’s rapid rate hikes will likely trigger a recession

Economists are growing increasingly concerned that the Bank of Canada's aggressive campaign to raise interest rates will plunge the economy into a recession.

On Monday, RBC's economics arm warned clients that an economic soft landing - where the Bank of Canada hikes interest rates and lowers inflation without causing an economic downturn - is becoming a increasingly unlikely."

With policymakers pledging to do what it takes to rein in inflation, we think a soft landing is becoming a distant prospect," said RBC senior economist Josh Nye.

Central banks are aware of the challenge but only the (Bank of England) has been bold enough to forecast a recession."

Since March, the central bank has embarked on a campaign to slow red-hot inflation by raising the cost of borrowing for consumers and businesses. The bank's economists have taken a so-called front loaded" approach to raising rates, where they hike rates at a faster clip in a shorter period of time to shock consumers into slowing their spending habits.

The central bank's fear - and one that is shared by several independent economists - is that inflation, if left unchecked, will become a permanent feature of the Canadian economy, a self-fulfilling prophecy where consumers and businesses drive up prices because they expect costs to keep rising.

The first rate hike came in March, followed by four more in the summer, including the latest hike in September, which brought the bank's policy rate to 3.25 per cent. Investors are betting that more rate hikes are on the way, and that the overall rate will hit 3.75 per cent before year's end.

At the latest rate hike's announcement, Bank of Canada governor Tiff Macklem warned that given the outlook for inflation, the governing council still judges that the policy interest rate will need to rise further."

But in recent speeches, even the central bank has warned Canadians that the hikes could cause economic difficulty. Most recently, its senior deputy governor, Carolyn Rogers, said in a speech in Calgary that there would be bumps" in the road as Canadian consumers adjust to higher borrowing costs.

As a result of those hikes, which helped slow the pace of inflation to 7.6 per cent in August, Canada is likely to see the beginnings of a recession later this year or in the first half of 2023, said Nye.

Economists typically define a recession as a period of temporary economic decline measured by two consecutive quarters of falling GDP. Those months can be painful for many, as businesses are likely to cut jobs and consumers struggle to afford basic necessities.

But Nye also contends that the rate hikes were necessary to control inflation - a threat even greater than a recession, he said.

While some of the global drivers of inflation - oil and non-energy commodity prices, supply chain pressures and shipping costs - are easing, domestic price pressures and elevated inflation expectations continue to make restrictive' monetary policy the preferred path for central banks," he said.

In a July study, the Canadian Centre for Policy Alternatives found that the central bank has a zero per cent success rate" of quickly raising interest rates without causing a recession.

There is simply no historical precedent for the Bank of Canada engineering a soft landing.' Each time the Bank of Canada has attempted such engineering through rapid interest rate hikes - which it appears to be set on doing now - it has resulted in a crash landing," said David Macdonald, CCPA senior economist.

Jacob Lorinc is a Toronto-based reporter covering business for the Star. Reach him via email: jlorinc@thestar.ca