As a result, TD said the Bank of Canada would hike interest rates by another quarter-point in July in an attempt to strike a balance between doubling down on inflation and easing the economy into a soft landing.

“… Policymakers are deciding what error they are comfortable in making: hiking too much and causing recession, or doing too little and potentially risking stagflation,” a former member of the US Federal Bank told TD Bank. “At this point in the economic cycle, it’s not yet clear which way the economy will break. The high-frequency data have not revealed a recession is unfolding, but the risk remains elevated as central banks probe for the magic number on the policy rate that will break the back of inflation.”

TD economists agreed that the Bank of Canada was entering a “trial-and-error stage” of policy-rate adjustment. As long as it continued to do so, however, Canada should not expect to see a rate cut any time soon “absent a harder landing” in the economy. TD predicted there would be no easing until the second quarter of 2024 at least – and only if core inflation metrics offered some “convincing evidence” to the central bank that it was on its way back to the Bank of Canada’s 2% target.

After announcing a 0.25% rate hike this July, TD predicted the Bank of Canada would then watch out for how the increase affected households and businesses. A real interest rate of 1% to 2% has been consistent with hard economic landings, it said in its forecast.

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