Central banks are racing to catch up with the highest inflation in decades, and the space for a so-called “soft landing” is narrowing, CIBC Asset Management’s chief investment officer says.
Last week, the Bank of Canada raised its benchmark interest rate by half a percentage point to 1%, which CIBC’s Luc de la Durantaye said was an attempt to get ahead of inflation expectations.
The move comes during the hottest inflationary period in three decades with prices for food, gas and housing soaring. On Wednesday, Canadian inflation for March came in hotter than expected at 6.7%.
Central banks are concerned about inflation expectations becoming de-anchored, de la Durantaye said, as a tight labour market drives wages higher. “And that takes a little longer to turn around,” he said.
He expects the Federal Reserve will also move forward with accelerated rate hikes and balance sheet reduction when it meets early next month.
“If they don’t start stepping up the interest rate hikes and the balance sheet reduction, there is a risk that inflation gets de-anchored,” de la Durantaye said. If that happens, central banks will have to hike “more and faster,” which will elevates risks.
Regardless, de la Durantaye does not forecast a recession in the next 12 months. He does, however, predict a deceleration in growth. And while he expects inflation to peak, it will likely still be well above the 2% target for the Federal Reserve and Bank of Canada a year from now.
Alternative scenarios are for central banks to either hike too aggressively or not aggressively enough, losing control of inflation.
“The central banks are managing a very narrow landing strip, if you will, to achieve a soft landing,” de la Durantaye said.
“I don’t think anybody can say at this stage whether that’s going to be achieved.”
Investors will have to be mindful of that “tug of war” between tightening too much and not tightening enough, he said. But the main recession indicators, such as the yield curve inverting for more than three months, haven’t yet materialized.
However, he said consumer sentiment is low by historical standards, which also plays into recession risk and is worth monitoring. Regardless, de la Durantaye said, “there’s no sure sign in the next 12 months that we’re heading into a recession.”
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