Canada’s oldest bank is the latest to warn investors to “brace for impact,” and get ready for a hard landing. BMO Capital Markets warned clients there’s no retreat from inflation. In a research note, the bank explained that high inflation leaves no choice but higher interest rates. Rates are rising at a speed and size that’s historically always produced a hard landing.
North America Is Forecast For A Hard Landing Within A Few Months
North America’s recession risk is climbing fast, and the bank expects it to land soon. The risk of recession climbed above 50%, well into the 60s according to other sources. BMO expects a recession to kick off in the first quarter of 2023. The forecast now sees a moderate recession, as the outlook worsens.
The reason for the worsening outlook is due to elevated inflation and rate hikes. Stubbornly high inflation will slow GDP growth, but it’s elevated way above target. Inflation at this level leaves central banks with no choice but to use higher rates. Rising interest rates are the lesser of the two evils.
“Financial markets are now fully absorbing the Fed’s harsh message that there will be no retreat from the inflation fight; the steep back-up in global rates further bludgeoned stocks, resource prices, and commodity currencies this week given mounting recession odds,” wrote Douglas Porter, BMO’s chief economist.
US Interest Rates To Climb Higher Than Canada
Interest rate forecasts keep climbing as inflation fails to respond fast enough. The US is expected to see its key interest rate rise to a range of 4.50% to 4.75% at the start of 2023. In Canada, BMO has forecast a slightly lower peak interest rate of 4.25%. Such aggressive rate hikes have always resulted in a hard landing.
“The only other periods when the Fed has hiked rates that rapidly in the post-war era were in 1973, 1980, and 1981, and all three episodes ended in recession,” explained Porter.
BMO is the latest institution to expect a recession, but they aren’t the only ones. Earlier this week, Oxford Economics wrote to clients to explain they now expect a moderate recession and sharp drop in home prices, instead of a soft landing.
