Central banks have taken off the gloves in the fight against inflation. They’ll win but global growth will lose out.
The market is no longer convinced that global central banks can tame inflation without a major hit to growth. Maybe that’s not a recession but it’s a much slower growth paradigm than assumed.
We’re now pricing in terminal rates at the highest levels since before the financial crisis and the risks from there remain to the upside.
I spoke with BNNBloomberg about this and the outlook for the Canadian dollar yesterday. Initially, I expect the Bank of Canada to be as hawkish as the Fed but the housing market is structurally different in Canada and far more vulnerable to rising rates. That will cap how high the BOC can go and will weigh on the loonie — something we’re seeing today.
The odds of a nightmare scenario for the Canadian housing market are rising.
What could happen is the Canadian housing market begins to dive and the BOC cuts back to zero but the Fed keeps hiking. That would negate the BOC’s ability to cushion the fall. One solution would be QE but zero rates and more bond buying would dramatically undermine the loonie and spur inflation.
All central bankers are walking the tight rope between growth and inflation right now but for the Bank of Canada, there’s no safety net. In the interview, I reference 74-cents; that’s 1.35 in USD/CAD.