📝 Front-Loading Can't Guarantee A Soft Landing: RBC

Front-loading has become the motto of central banks looking to quickly remove policy support amid intense inflationary pressure. The BoC continued with its steepest tightening cycle in dec-ades, lifting its overnight rate by a further 75 bps in early September. The ECB matched that increase the following day and we expect the Fed will do the same later this month. It’s telling that the 50 bp increase we expect from the BoE this week now looks modest. There’s more to come from each of these central banks as they blow past “neutral” into “restrictive” territory, tapping the brakes on demand in an effort to keep an inflationary spiral from developing

Central banks are aware of the challenge but only the BoE has been bold enough to forecast a recession. For our part, we think a European downturn is already underway as a continental energy crisis deepens. Canada, the US and UK are likely to see their own eco-nomic contractions beginning later this year or in 2023.

We were previously expecting a final 25 bp rate hike at the BoC’s next meeting in Octo-ber. But given the central bank’s hawkish language as well as ongoing acceleration in core inflation and wage growth we now see a 50 bp increase next month and a further 25

bp hike in December for a terminal overnight rate of 4% (up from 3.5% previously). That’s slightly ahead of market expectations, but we think upcoming inflation reports and inflation expectations (particularly the BoC’s BOS and CSCE surveys in October) will be key to whether consensus lands on a 25 or 50 bp hike at the next meeting.

- RBC