Navigating Economic Soft Landings: Canada's Experience Holds Insights
Navigating Economic Soft Landings: Canada's Experience Holds Insights
Date Posted: February 22, 2024
The Bank of Canada's ability to orchestrate a 'soft landing' for the economy—a delicate scenario of slowing growth to curb inflation without triggering recession—has been questioned by skeptics. Yet, contrary to doubts, Canada has consistently steered clear of recessions, maintaining a commendable track record.
According to recent research by CIBC economists Avery Shenfeld and Ali Jaffery, soft landings in Canada are more frequent than commonly believed. Since the 1980s, over half of the country's easing cycles have achieved this equilibrium, demonstrating the central bank's adeptness in managing economic transitions. In contrast, the U.S. Federal Reserve has had fewer instances of successful soft landings.
The economists emphasize that soft landings entail a gradual pace of rate cuts, typically spanning about six quarters until rates return to neutral. Reflecting on historical data, they note that such cycles commence with monetary policy in a restrictive stance, with rates above the neutral threshold. The exception was the 2014 oil price shock, where rates remained below neutral throughout the period.
Examining the implications for the current economic landscape, the report suggests that Canada's easing cycle may span until late 2025, assuming initiation in mid-2024, with rates reaching 2.5% to 3%. However, contemporary challenges differ from past cycles, notably the persistently high inflation levels experienced, which peaked at 8.1% in June 2022.
Despite inflation concerns, both the Bank of Canada and the U.S. Federal Reserve remain vigilant, aiming to prevent inflation from remaining elevated. The economists posit that central banks might adjust the pace of rate cuts to support demand while ensuring inflation returns to target levels.
In summary, Canada's history offers valuable insights into navigating economic soft landings, emphasizing the importance of gradual adjustments and adaptability to current challenges. Looking at our history will allow us to get a sense of what's to come and help us make informed decisions in our financial lives.