{"id":1753,"date":"2022-09-12T04:25:52","date_gmt":"2022-09-12T04:25:52","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/2022\/09\/12\/front-loading-cant-guarantee-a-soft-landing\/"},"modified":"2025-03-26T04:54:43","modified_gmt":"2025-03-26T04:54:43","slug":"front-loading-cant-guarantee-a-soft-landing","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/front-loading-cant-guarantee-a-soft-landing\/","title":{"rendered":"Front-loading can&#8217;t guarantee a soft landing"},"content":{"rendered":"<h4>Highlights<\/h4>\n<li>Central banks hiked rates aggressively over the summer and aren\u2019t done yet&#8230;<\/li>\n<li>\u2026with monetary policy now moving into \u201crestrictive\u201d territory.<\/li>\n<li>Policymakers are front-loading rate hikes, hoping to contain inflation without a hard landing\u2026 <\/li>\n<li>\u2026but we expect mild recessions in Canada, the US, UK and euro area later this year or in 2023.<\/li>\n<li>Yield curves should continue to flatten as central banks reach terminal policy rates.<\/li>\n<hr>\n<p>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 decades, 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\u2019s telling that the 50 bp increase we expect from the BoE this week now looks modest. There\u2019s more to come from each of these central banks as they blow past \u201cneutral\u201d into \u201crestrictive\u201d territory, tapping the brakes on demand in an effort to keep an inflationary spiral from developing. <\/p>\n<p><a href=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2024\/11\/bisbull59.pdf\">BIS research<\/a> suggests front-loaded rate hikes \u201ccan help prevent a hard landing.\u201d But with policymakers pledging to do what it takes to rein in inflation, we think a soft landing is becoming a distant prospect. 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 economic contractions beginning later this year or in 2023. These declines, while unpleasant, are arguably needed to return supply and demand to better balance and ease inflationary pressure. While some of the global drivers of inflation\u2014oil and non-energy commodity prices, supply chain pressures and shipping costs\u2014are easing, domestic price pressures and elevated inflation expectations continue to make \u201crestrictive\u201d monetary policy the preferred path for central banks.<\/p>\n<div id=\"everviz-oGLJCw3Gb\" class=\"everviz-oGLJCw3Gb\"><script src=\"https:\/\/app.everviz.com\/inject\/oGLJCw3Gb\/\" defer=\"defer\"><\/script><\/div>\n<h4>Hawkish BoC points to even more rate hikes\u2026<\/h4>\n<p>The BoC followed up July\u2019s surprisingly large 100 bp hike with another oversized 75 bp increase in September (this time in line with expectations). At 3.25% the overnight rate is now slightly above the 2-3% range the BoC considers neutral. Debate was previously heating up over whether September\u2019s hike would be followed by a pause\u2014in July the BoC itself said it was front-loading hikes to get the policy rate \u201cquickly to the top end or slightly above the neutral range.\u201d But September\u2019s policy statement made clear the BoC isn\u2019t done raising rates yet, saying \u201cGoverning Council still judges that the policy interest rate will need to rise further.\u201d It did, however, hint that the pace of increases is likely to slow going forward.<\/p>\n<p>That guidance wasn\u2019t the only hawkish element of the BoC\u2019s policy statement. It emphasized that July\u2019s decline in headline inflation (the first in more than a year) was driven by lower gasoline prices, while core measures accelerated and price pressure broadened. We expect that combination\u2014lower headline readings but firm core inflation\u2014will continue in the near term. While Q2 GDP was softer than projected, the BoC emphasized strength in domestic demand. It said growth is expected to slow in the second half of the year but we didn\u2019t detect much discomfort with forecasts presented in July\u2019s MPR\u2014including a 1.8% GDP gain projected in 2023 that looks increasingly optimistic relative to consensus and particularly our own call for a 0.6% increase. <\/p>\n<p>We were previously expecting a final 25 bp rate hike at the BoC\u2019s next meeting in October. But given the central bank\u2019s 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\u2019s slightly ahead of market expectations, but we think upcoming inflation reports and inflation expectations (particularly the BoC\u2019s BOS and CSCE surveys in October) will be key to whether consensus lands on a 25 or 50 bp hike at the next meeting. <\/p>\n<div id=\"everviz-XTva9WAL_\" class=\"everviz-XTva9WAL_\"><script src=\"https:\/\/app.everviz.com\/inject\/XTva9WAL_\/\" defer=\"defer\"><\/script><\/div>\n<h4>\u2026even as the economy\u2019s momentum begins to fade<\/h4>\n<p>Canadian GDP rose an annualized 3.3% in Q2, roughly matching the previous quarter\u2019s 3.1% pace and marking a fourth straight quarter of above-trend growth. But much of the increase in activity came early in Q2, and with StatCan\u2019s flash estimate showing a 0.1% decline in July GDP the economy has essentially failed to expand over the past three months. Housing acted as a sizeable drag on second-quarter growth and an ongoing pullback in resale activity over the summer suggests a repeat performance in Q3. Household spending accelerated in Q2, led by services as Canadians faced the fewest pandemic restrictions since early-2020. But <\/p>\n<p>RBC\u2019s consumer tracker shows spending volumes leveling off in August, including in high-touch services like restaurants and travel, as higher inflation sapped confidence and ate into households\u2019 purchasing power.<\/p>\n<p>Labour market data also suggest the economy has lost a step in recent months. Employment declined in each of the past three months and the jobless rate has drifted higher, albeit to a still-healthy 5.4% as of August. Job postings have moderated though employers continue to report widespread labour shortages and wages accelerated over the summer. These wage gains, though, are failing to stay ahead of consumer prices and real average hourly earnings have failed to increase relative to pre-pandemic. While headline inflation has likely peaked we think a sharp increase in the cost of living combined with reversing wealth effects will make for a challenging consumer spending backdrop going forward. A steady increase in economy-wide debt servicing costs as the impact of rate hikes filters through the economy will also slow spending. We look for GDP growth to slow to a sub-trend pace in the second half of the year and think it will be difficult to avoid an outright recession in 2023. Despite its rosy GDP forecast, the BoC has acknowledged a soft landing will be difficult to achieve. With the BoC now expected to take monetary policy even further into restrictive territory, we\u2019re even more convinced of that.<\/p>\n<h4>Canadian dollar struggling to keep up with high-flying USD<\/h4>\n<p>The Canadian dollar fell to 76 cents at the beginning of September, its lowest level relative to the US dollar since late-2020. An ongoing pullback in oil prices\u2014WTI fell below US$90 per barrel for the first time since Russia\u2019s invasion of Ukraine\u2014has weighed on the loonie. But the bigger headwind has been broad US dollar strength, with the trade-weighted USD continuing to climb to fresh two-decade highs. Aggressive Fed tightening, global growth concerns and risk aversion have all contributed to the greenback\u2019s double-digit year-to-date increase. The Canadian dollar has actually held its own, outperforming all other G10 currencies through the first eight months of the year with the ex-USD trade-weighted index up more than 5% year-to-date. We think the US dollar will lose some of its shine next year, though a challenging global growth backdrop will continue to weigh on commodity currencies like the Canadian dollar which we see gravitating toward 75 cents in 2023.<\/p>\n<div id=\"everviz-Dqn6SCgws\" class=\"everviz-Dqn6SCgws\"><script src=\"https:\/\/app.everviz.com\/inject\/Dqn6SCgws\/\" defer=\"defer\"><\/script><\/div>\n<h4>Fed pushes back against rate cut bets\u2026<\/h4>\n<p>August saw a course correction from the Fed after the market interpreted its July policy meeting as dovish. Recall, Powell\u2019s comments suggesting it will soon be appropriate to slow the pace of rate hikes, and that the Fed is \u201cgetting closer to where we need to be,\u201d were seen as signaling the tightening cycle is nearing an end. Investors went a step further, pricing in several rate cuts next year. Falling Treasury yields (exacerbated by growth concerns and signs of slowing inflation) and an equity market rally made for easing financial conditions that the Fed likely saw as premature.<\/p>\n<p>Cue push-back from the central bank, with a raft of speakers in August talking up more rate hikes to come and emphasizing that the Fed won\u2019t begin reversing course in 2023. Chair Powell continued with that messaging in his brief Jackson Hole address in late August. He said getting inflation back to target \u201cwill likely require maintaining a restrictive policy stance for some time\u201d\u2014clearly an effort to deter market pricing for rate cuts next year. And Powell acknowledged higher interest rates will \u201cbring some pain to households and businesses\u201d\u2014in our view meant to suggest the Fed won\u2019t \u2018blink\u2019 and cut rates in the face of a slowing economy. Markets got the message, with equities selling off sharply following Powell\u2019s address and yields climbing in early-September.<\/p>\n<p>We think the Fed needs to follow up these words with action, and we now look for another 75 bp hike later this month, up from the 50 bp increase previously expected. We still think the pace of tightening is likely to slow later this year and see 50 and 25 bp hikes in November and December, respectively, lifting fed funds to a 3.75-4% range. That\u2019s at the upper end of expectations in the Fed\u2019s September \u2018dot plot\u2019, though the committee median did see rates rising to that level next year and we think a desire to front load hikes is consistent with our call. We\u2019ve lifted our Treasury yield forecasts but still think 10s will come down toward the 3% mark\u2014reasserting the deeper yield curve inversion seen in August\u2014as inflation slows and growth concerns intensify. <\/p>\n<div id=\"everviz-d_D9fGUXV\" class=\"everviz-d_D9fGUXV\"><script src=\"https:\/\/app.everviz.com\/inject\/d_D9fGUXV\/\" defer=\"defer\"><\/script><\/div>\n<h4>\u2026amid mixed US data<\/h4>\n<p>While GDP data point to a \u2018technical\u2019 recession in the first half of the year, a broader set of indicators continue to paint a more mixed picture of the US economy. We\u2019ve emphasized that a declining unemployment rate in H1\/22 is inconsistent with the economy actually being in recession. While the jobless rate ticked higher in August, payrolls increased by a healthy 315,000\u2014enough to finally lift the employment count above its pre-pandemic level. Job openings rose in July, and the recent upward drift in initial claims appears to have run its course for now, suggesting the labour market remains healthy. Wage growth has consistently exceeded 5% this year, though that has done little to boost real disposable income amid surging inflation. The rising cost of living has weighed on consumer confidence, though sentiment improved in August as pump prices turned lower. <\/p>\n<p>We look for US GDP to return to the growth column in the second half of the year, albeit to a below-trend pace. As the Fed moves its policy rate into restrictive territory and high inflation continues to bite we see that slowdown intensifying in the first half of next year\u2014that\u2019s when the \u201crecession\u201d label will finally be appropriate. The downturn we expect in 2023 is on the mild end of past recessions, with the jobless rate seen rising toward 5% by the end of next year from as low as 3.5% this summer.<\/p>\n<h4>ECB to hike aggressively even as recession likely underway<\/h4>\n<p>The ECB accelerated its nascent tightening cycle in September, raising its key policy rates by 75 bps to build on an initial 50 bp hike in July. In a hawkish press conference, President Lagarde said rates are still far away from levels needed to rein in inflation, implying they\u2019ll need to rise another 150 to 200 basis points over the next several meetings. As such, we\u2019ve revised our terminal deposit rate forecast significantly higher to 2.5% from 1.5% previously. We think another 75 bp hike is in store for October before the pace of tightening is geared down with a final 25 bp hike seen next March. That would move monetary policy clearly into restrictive territory\u2014neutral in the euro area is likely around 1.5%\u2014with the ECB keen to tamp down inflation and inflation expectations even as higher energy prices are likely to cause a recession in their own right.<\/p>\n<p>Indeed, we\u2019ve marked down our euro area GDP growth forecast and now see a contraction beginning in the current quarter and continuing through Q1\/23. The economy is expected to see little growth in 2023 as a whole with our 0.1% forecast coming in well below the ECB\u2019s assumed 0.9% increase. The latter, though, was conditioned on Russian gas flows remaining near mid-August levels\u2014an assumption that now looks optimistic given the indefinite suspension of imports via a key pipeline. With sharply higher natural gas prices putting a squeeze on consumers and the industrial sector\u2014notwithstanding government support\u2014we think a recession is now unavoidable. GDP declines could be even deeper if shortages are more severe than expected and government rationing and forced business closures are required.<\/p>\n<h4>Some inflation relief coming, but BoE set to continue hiking<\/h4>\n<p>We expect another 50 bp increase in Bank Rate at the BoE\u2019s meeting this week, matching the August increase. While a larger 75 bp hike is likely to be considered (market pricing is between 50 and 75 bps) we think recent inflation developments will keep the BoE from accelerating its tightening cycle. New PM Truss\u2019s \u00a3150 billion energy relief plan will cap household energy bills, preventing sizeable increases that were due to kick in this fall and early next year. That should keep CPI inflation from rising as high as the 13% projected by the BoE later this year. This massive fiscal support will offset some of what would have been a significant drag on consumer spending, and could actually add to domestic inflationary pressure outside of energy prices, though the BoE\u2019s chief economist said the net effect should be lower inflation.<\/p>\n<p>Even with some energy price relief, UK inflation looks set to remain well above the BoE\u2019s target through 2023. That should keep the BoE in tightening mode with a further 75 bps of hikes in the fourth quarter expected to lift Bank Rate to 3% by year end. Rising interest rates add to a list of growth headwinds including a cost of living squeeze, higher energy costs for businesses (where relief is less generous) and recession in Europe. We\u2019ve revised our GDP growth forecasts lower\u2026 and agree with the BoE that the UK economy will enter a recession toward the end of the year.<\/p>\n<h4>RBA set to slow its tightening cycle after rapid-fire hikes<\/h4>\n<p>Having already front-loaded its tightening cycle with 50 bp hikes at each of its past four meetings since June, we think the RBA will opt for smaller increases at upcoming meetings. We look for 25 bp hikes in October, November and December leaving cash rate at 3.1% by end of year\u2014slightly higher than the 2.85% terminal rate previously assumed and just above the 2-3% range considered neutral, but not quite as restrictive (relatively speaking) as our expectations for other central banks. Indeed, the RBA sounded dovish compared with its global counterparts in September. Governor Lowe noted Australian wage dynamics\u2014key to inflation expectations\u2014are not as strong as in other developed economies and thus rate dynamics should differ as well. He also emphasized lags in the effect of monetary policy on the economy and said the case for slower rate hikes becomes stronger as the cash rate rises. Lowe\u2019s speech followed a firm set of national accounts data for Q2, albeit with early signs of moderation in rate-sensitive housing. We look for GDP gains to slow in the coming quarters as tightening financial conditions and global growth headwinds increase. <\/p>\n<p>\u00a0<\/p>\n<hr>\n<div class=\"rds-callout-white\" style=\"border: 1px solid #c4c8cc;\">\n<div class=\"rds-gcw\">\n<div class=\"img w-mob-100\" style=\"display: inline-block; vertical-align: top;\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-30186\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/23\/2025\/03\/econ-download-1.png\" alt=\"\" width=\"261\" height=\"177\" \/><\/div>\n<div class=\"rds-inline pad-hlf\" style=\"display: inline-block; vertical-align: top;\">\n<h4 class=\"mar-t\">See Full Report<\/h4>\n<p><a class=\"btn tertiary\" role=\"button\" href=\"https:\/\/royal-bank-of-canada-2124.docs.contently.com\/v\/fmm-sep-2022\" target=\"_blank\" rel=\"noopener noreferrer\" data-dig-id=\"TNL_211008\" data-dig-category=\"TNL Economics\" data-dig-action=\"mid-funnel click\" data-dig-label=\"Central banks shuffling toward the exit PDF\">Download<\/a><\/p>\n<\/div>\n<\/div>\n<\/div>\n<p>\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Front-loading has become the motto of central banks looking to quickly remove policy support amid intense inflationary pressure.<\/p>\n","protected":false},"author":268,"featured_media":1751,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"advgb_blocks_editor_width":"","advgb_blocks_columns_visual_guide":"","footnotes":""},"categories":[48],"tags":[11],"class_list":["post-1753","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-markets-monthly","tag-economy"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.2 (Yoast SEO v27.2) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Front-loading can&#039;t guarantee a soft landing - 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