Royal Bank of Canada Chief Executive Officer Dave McKay said a modest recession is likely to occur in Canada, however that could be dampened by strong consumer demand and high levels of liquidity in the market. 

McKay said in an exclusive interview with BNN Bloomberg Tuesday that an interest rate-induced “orderly slowing” is taking place in Canada’s economy. This slowing stems from the Bank of Canada’s rate hiking campaign to bring inflation down and bring about a soft landing, he said. As the potential end of the central bank's rate increases is expected to near, McKay believes inflation has peaked.

“All that to say we do expect a modest recession, supported by still strong latent demand by the consumer but also this enormous liquidity that we have in the marketplace. [There’s] $300-plus billion in cash sitting on balance sheets to absorb the shocks from higher rates,” McKay said, adding that it could support a quicker recovery. 

“Higher rates will slow things down, but it should be a modest slowdown.”

Heightened interest rates have weighed on consumer spending power, McKay said.

“With that slower spending, you're seeing [prices in] the Canadian housing market come off roughly 14 [per cent to] 15 per cent, as [was] our expectation. Demand is off almost 40 per cent of housing activity,” McKay said. 


McKay said job losses are expected to occur in Canada’s economy with the unemployment rate expected to hit around six to seven per cent. Statistics Canada recently said Canada’s jobless rate was 5.0 per cent in December.  

The current economic situation is “unprecedented,” but the slowdown is starting with low levels of unemployment: “So, starting with low unemployment, [a] significant number of open jobs, that is inflation in its own right and that helps us recover as well, the number of open jobs,” he said. 

However, an increase in unemployment could be partly absorbed by the “enormous liquidity” that exists in the market, McKay noted. 

“We started pre-pandemic with roughly $40 billion of consumer liquidity and another $30 billion to 40 billion of commercial corporate liquidity,” he said.

“That liquidity can be used to spend and help the economy recover. [It is an] unprecedented amount of liquidity, almost 20 per cent of gross domestic product. So, when you think about that latent spending power, it's [a] very significant stimulus for recovery.” 


If the Bank of Canada hiked rates sooner than March 2022, McKay said the impact on consumers might have been avoided. He said he expects one more rate hike from the central bank followed by a period of holding rates steady for the next year. 

The Canadian central bank increased interest rates seven times in 2022, beginning in March, in a series of actions that brought the policy rate to 4.25 per cent. It will make its next rate decision on Wednesday where economists polled by Bloomberg News expect the policy rate to increase by 25 basis points to 4.5 per cent.

“We do want to finish the job … to get control of inflation. We are on that track. It's taken higher rates than any of us would have expected, 4.5 per cent potentially, probably closer to five [per cent] in the United States,” McKay said. 

“We'll have to hold rates there for a while to make sure we got the job done on inflation, and then hopefully, the latter part of 2024 we’ll be able to start easing.” 

He said that if interest rates remain high into late 2024 and 2025, the effects will be more severe on consumers, especially on those with mortgages.