Canada’s finance minister says ‘soft landing’ not guaranteed as rates rise

Canadian Finance Minister Chrystia Freeland expressed confidence on Thursday in the Bank of Canada’s ability to rein in surging inflation and keep price gains from becoming entrenched, but said there was no guarantee the economy would avoid a recession.

“The Bank has begun the work of bringing inflation back within target, and it has the tools and the expertise it needs to keep inflation from becoming entrenched,” Freeland told a business audience in Toronto.

“A soft landing is not guaranteed,” she added, referring to a situation in which a hot economy slows but does not enter a recession. Freeland said Canada’s economy was well-placed for that scenario.

Inflation is running hot around the world, as booming demand has led to supply constraints, and commodity prices have surged due to Russia’s invasion of Ukraine. Canada’s inflation rate hit 6.8% on an annualized basis in April and is set to go higher before easing later this year.

To curb price increases, the Bank of Canada raised its benchmark interest rate by half a percentage point to 1.5% this month, the second consecutive hike of that magnitude, and said it was ready to act “more forcefully” if needed.

Money markets see a 70% chance that the Bank of Canada will match a 75-basis-point rate hike unveiled by the Federal Reserve on Wednesday when the Canadian central bank announces its next policy decision in July.

Freeland, who outlined C$8.9 billion ($6.90 billion) of previously announced spending in her speech, said Prime Minister Justin Trudeau’s Liberal government remains focused on lowering the country’s debt-to-GDP ratio and reducing deficits.

“Our pandemic debt must – and will – be paid down,” she said.