Bank of Canada's rapid rate hikes likely to cause a recession, study finds

Photo: The Canadian Press

The Bank of Canada's strategy of rapidly increasing its key interest rate in an effort to tackle skyrocketing inflation will likely trigger a recession, a new study from the Canadian Centre for Policy Alternatives says.

The research institute says if the central bank aims to bring inflation down from 7.7 per cent to its two per cent target by quickly raising rates, it could cause significant "collateral damage," including 850,000 job losses.

It adds that the central bank has had a zero per cent success rate with this approach, noting that a 5.7 per cent drop in the inflation rate has happened three times over the last 60 years, each time after big rate hikes and accompanied by a recession.

The CCPA says it's time for a new policy on inflation.

It says the Bank of Canada could potentially reduce the risk of sending the economy into a recession if it adjusts its target inflation rate to four per cent.

This study comes a day after the Bank of Canada released two quarterly surveys which revealed consumers and businesses expect inflation to stay high for several years.