Markets are doubting central banks’ ability to quickly bring down inflation: Rate strategist
Two of Canada’s top investment bankers voiced concern that the rising interest rates that have already dragged down asset values from stocks to cryptocurrencies could plunge the global economy into a recession.
Dan Barclay, chief executive officer of capital markets at the Bank of Montreal, said interest rate hikes by central banks around the world could fail to arrest recent spikes in consumer prices because they are rooted in post-pandemic supply chain snarls and Russia’s invasion of Ukraine. But they could still wallop economic growth.
“I’m hoping you’ll have a nice correction, we will take some of the froth out of a bunch of markets and we’ll have a nice soft landing,” he said at the Bloomberg Canada Capital Markets Forum in Toronto. “That would be my hope story. My fear story is that they raise rates really, really hard, they can’t fix demand, because it’s a supply problem and not demand, and we will have a very deep recession.”
Central banks around the world are embarking on an unusually aggressive campaign of interest rate increases -- both the US Federal Reserve and the Bank of Canada raised rates by 50 basis points recently, twice their normal pace -- to try to wrestle inflation down from multi-decade highs.
That rapid rise in borrowing costs has already resulted in US stocks tumbling 18 per cent from this year’s peak, while assets from bonds to Bitcoin have been routed too.
The S&P 500’s latest move lower has nearly priced in the risks for recession to develop in the next year, according to the fair-value model of Bloomberg Intelligence. The equity benchmark would only need to fall another 4.4 per cent to hit 3,760, which is the level where investors are pricing in a U.S. economic downturn, BI data shows.
Roman Dubczak, managing director and head of global investment banking at Canadian Imperial Bank of Commerce, added that the central bankers’ job is even more difficult because they’re unwinding the programs of bond purchases they put in place to drive down market borrowing rates during times of crisis, at the same time that they’re raising rates.
“You’ve got to land two planes on a postage stamp, not one,” he said, speaking at the same Bloomberg event. “Hence you’re seeing market activity being what it is. It’s just a lot of precision required right now.”