Larry Berman's Educational Segment
A former deputy governor of the Bank of Canada says the central bank’s aggressive rate hikes have effectively slowed the economy, making a soft landing likely, though he cautions that outcome is not guaranteed.
Should the trend of sticky inflation continue, the chance for a soft economic landing will become less probable, Paul Beaudry, former deputy governor of the Bank of Canada, told BNN Bloomberg in a television interview on Monday.
“I would only say there's a 60 to 70 per cent chance of a soft landing, but there’s still 30 per cent of it going the other way,” said Beaudry, who left his position at the Bank of Canada in July.
Beaudry explained that while the Bank of Canada’s rate hikes to date have been successful in slowing Canada’s economic activity, sticky inflation could force the bank’s hand to hike yet again.
“I think it’s a plausible scenario (to get a soft landing), it’s the most likely one, but let’s not oversell it either,” he added.
If the economy reaches a balance in demand and supply but inflation persists, this will call for more rate increases, Beaudry said.
“Then you’re really pushing the economy into a recession,” he said.
HOUSING AS A DRIVER OF INFLATION
In addition to higher oil costs, higher Canadian mortgage payments are also contributing to the country’s elevated inflation read.
While Beaudry agrees that housing costs may be contributing to a higher cost of living, he said this is only one piece of the puzzle.
“That’s a part in the overall story but it’s a narrow part,” he argued.
The Bank of Canada must continue to make policy decisions based numerous data points, he said, adding that it will take time for previous rate hikes to work their way through Canada’s economy.
As for Canada’s housing resilience, Beaudry said he believes higher rates for longer might change valuations in the long run.