Scotiabank Calls for 100 Basis-Point Rate Hike, Warns of Recession in Early 2023

Scotiabank is sounding the alarm over the downward trajectory of the Canadian economy, warning of a technical recession in early 2023 accompanied by interest rates as high as 4.25%.

According to Scotiabank chief economist Jean-François Perrault, Canada’s economy is expected to contract substantially over the next 12 months, with GDP growth slowing from a current 3.2% to a paltry 0.6% next year, which will bring on a” technical recession in the first half of 2023.” As such, the bank now anticipates the Bank of Canada will have to aggressively raise its overnight rate before the end of the year by at least 100 basis points to 4.25%.

“This change in view on our policy rate forecast—our last forecast expected the policy rate to peak at 3.75 per cent—reflects in equal measure the fiscal support measures being rolled out domestically, as well as the impact of a rapidly depreciating Canadian dollar,” he told Bloomberg. Perrault cited a number of factors fuelling persistent inflation, namely that being the Liberal government’s generous fiscal programs, which although may or may not provide support to Canadians in lower income quintiles, are ultimately making the Bank of Canada’s job more difficult.

The central bank is also contending with a weakened Canadian dollar. With a strong dollar south of the border, the US is by default exporting its inflationary pressures into Canada, Perrault explained. Still, he believes the US will too, enter a recession because the Federal Reserve is also well behind the curve in taming runaway price pressures. “In the United States, we now believe the Federal Reserve will need to hike its policy rate to five per cent by early 2023. This is 150 basis points more than our last forecast,” he said. “This additional tightening and a substantial decline in equity markets (impacting household wealth) are enough to trigger a recession.”

The Bank of Canada’s next policy decision is scheduled for October 26, and consensus estimates compiled by Reuters are calling for a hike of 50 basis points, potentially marking the second straight reduction in rate increases since policy makers delivered a colossal full percentage point move in July.

Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

Leave a Reply