The Bank of Canada says the economy needs to slow from overheated levels in order to ease inflation. If its tightening campaign overshoots to achieve that objective, it could trigger a deeper downturn
As the Bank of Canada considers ditching oversized interest rate hikes, it is dealing with an economy likely more overheated than previously thought but also the bond market’s clearest signal yet that recession and lower inflation lie ahead.
Some analysts see curve inversions as predictors of recessions. Canada’s economy is likely to be particularly sensitive to higher rates after Canadians borrowed heavily during the COVID-19 pandemic to participate in a red-hot housing market. Canada’s employment report for November showed that the labour market remains tight, while gross domestic product grew at an annualized rate of 2.9 per cent in the third quarter.
The BoC has forecast that growth would stall from the fourth quarter of this year through the middle of 2023.
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