In a note to clients Wednesday, Desjardins managing director and head of macro strategy Royce Mendes said that if the central bank is hell-bent on getting price pressures back to its range, the cost will be significant, especially as workers push for higher wages to combat the erosion of purchasing power.
“The only sure-fire way to contain that risk is to fly a kamikaze mission. Looking at U.S. wage data, since Canadian numbers don’t go back far enough in time, it’s clear that recessions can break the cycle [of higher wages fueling inflation,]” he said.
Mendes said that Bank of Canada Governor Tiff Macklem and his colleagues have little choice to trigger such a recession if they hope to break the current inflationary cycle, where price pressures are running at more than three times the central bank’s target rate.
“To hit its inflation mark, the central bank has little choice now but to aim for a recession. A monetary-policy induced recession in Canada became our base-case forecast in early summer. Recent data releases, and the Bank of Canada’s reaction to them, have reinforced that view,” he said.
“While some shops are still debating whether or not a recession is on the horizon, we’re now wondering if it will only be a mild downturn.”
Canadian inflation has ticked modestly lower from its recent peak of 8.1 per cent – largely due to a decline in gasoline prices – but still remains at 7.6 per cent, well above the central bank’s comfort range.
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