According to Mendes, if the Bank of Canada’s Tiff Macklem and his colleagues want to end the current inflationary cycle, in which price pressures are running at more than three times the central bank’s target rate, they have little choice but to start such a recession.
Despite a slight decline from its recent peak of 8.1%, Canadian inflation is still at 7.6%, well above the central bank’s comfort level. This is largely because of a drop in gasoline prices.
In response, the Bank of Canada issued a warning about the possibility of a “wage-price spiral,” in which workers demand higher pay, which in turn puts more money in consumers’ pockets and ultimately drives up prices. While wages have not kept up with inflation in Canada, they are still running at a rate of about 5.5%.
Mendes warned that recent homebuyers with variable-rate mortgages would suffer even though the Desjardins team continued to predict a terminal rate of 3.75%, the point at which central banks end their policy cycle of raising or lowering borrowing costs.
“Even just a 3.75 per cent terminal rate spells trouble for these borrowers, with the monthly interest owed on the mortgage slightly exceeding the total fixed payment,” he said.
