The director of BMO Capital Markets fears a deep recession due to rate hikes

Two of Canada’s top investment bankers have expressed concern that rising interest rates that have already driven asset values ​​from stocks to cryptocurrencies could plunge the global economy into a recession.

Dan Barclay, executive director of capital markets at the Bank of Montreal, said interest rate hikes by central banks around the world may not stop recent increases in consumer prices because they are rooted in entanglements. of the supply chain following the pandemic and Russia’s invasion of Ukraine. . But they could still hit economic growth.

“Hopefully it will have a good correction, we’ll get some of the froth out of a lot of markets and have a nice soft landing,” he said at the Bloomberg Canada Capital Markets Forum in Toronto. “That would be my story of hope. My fear story is that they raise rates very, very strongly, they can’t fix demand, because it’s a supply problem and not a demand problem, and we’ll have a very deep recession.”

Central banks around the world are embarking on an unusually aggressive campaign of interest rate hikes (both the US Federal Reserve and the Bank of Canada raised rates by 50 basis points recently, double their normal rhythm) to try to reduce inflation -maximum of the decade.

That rapid rise in borrowing costs has already sent US stocks down 18 percent from this year’s high, while bond-to-Bitcoin assets have also strayed.

The S&P 500’s latest move lower has all but discounted the risks of a recession developing in the next year, according to Bloomberg Intelligence’s fair value model. The benchmark stock index would only need to fall another 4.4 percent to reach 3,760, which is the level at which investors are pricing in a US economic downturn, BI data shows.

Roman Dubczak, managing director and head of global investment banking at the Canadian Imperial Bank of Commerce, added that central bankers’ job is made even harder because they are undoing the bond-buying programs they put in place to drive down market borrowing rates. during times of crisis, at the same time that rates are rising.

“You have to land two planes on a postage stamp, not one,” he said, speaking at the same Bloomberg event. “So you’re seeing the market activity being what it is. It’s just that a lot of precision is required right now.”

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