In the wake of the Bank of Canada’s surprising the market with a 1.00% hike of its overnight rate, CIBC Deputy Chief Economist Benjamin Tal provided a 4 minute video of his outlook on inflation, interest rates and the economy, and how investors should view these developments.
- Inflation should not be our main concern, because there are forces that will bring it back to more moderate levels. We should be more concerned about the cost to the economy of getting it back down.
- The Bank of Canada’s goal is not to prevent recessions, but to limit inflation expectations to avoid a destructive wage-price spiral.
- There is a 40-45% chance the bank will hike rates more than it needs to and cause a recession. They have signaled they want to go from 2.5% up to between 3 and 3.5%, but the difference between 3% and 3.5% may be the difference between a slowdown and a recession.
- Inflation is a lagging indicator and usually peaks 4 to 6 months after the start of a recession, but no central banker will resist increasing interest rates when inflation rates are high.
- Every recession in the past 40 years (except Covid) was helped – if not caused – by central banks hiking rates higher than they needed to.
- There is still a good chance they won’t overshoot this time, because the significant increase from Covid-era lows are already starting to be effective at curbing demand, and there is still lots of strength to support growth.
- So the rate hikes are probably already slowing growth, and if we do end up in a recession, it should be short and mild because
o We have record high job vacancies
o Consumers are sitting on about $300 billion in excess cash
o The housing market is undersupplied and should support growth for years
- Covid job losses were mostly lower income, higher earners took advantage of low interest rates to buy housing, so we borrowed some growth from the future
o 20-25% home price declines would not be surprising
o Rents did not rise during the pandemic, but they are rising now
o Construction costs have risen faster than condo prices, so this sector is slowing now, but will rebound once supply and demand are back in balance
- Equity markets have already priced in a lot of the bad news, and may have priced in more interest rate hikes than will be required.
o If you have limited time horizon, equities are still risky
o If your time horizon is 2-3 years, there are a lot of good opportunities out there.
Link to Video: https://link.videoplatform.limelight.com/media/?mediaId=3d73878551b043c7a33bd5f0ccbf09f9&width=540&height=321&playerForm=LVPPlayer&embedMode=html&htmlPlayerFilename=limelightjs-player.js&orgid=7e36bf0095db492cb2c8179d58eb0e29