BMO Capital Markets chief fears deep recession following rate hikes

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

Dan Barclay, chief financial markets officer at Bank of Montreal, said interest rate hikes by central banks around the world may not stop recent consumer price spikes because they are rooted in post-pandemic supply chain grunts and Russia’s invasion of Ukraine. . But they could still weigh on economic growth.

“Hopefully you’ll have a good correction, we’ll get some of the scum out of a bunch of markets and we’ll have a nice soft landing,” he told the Bloomberg Canada Capital Markets Forum in Toronto. “That would be my story of hope. My fear story is that they raise rates really, really hard, they can’t fix the demand, because it’s a supply problem, not a demand problem, and we’re going to have a really deep recession.

Central banks around the world are embarking on an unusually aggressive campaign of interest rate hikes – the US Federal Reserve and the Bank of Canada recently hiked rates by 50 basis points, double their normal pace – to attempt to reduce inflation from multi-decade highs.

This rapid increase in borrowing costs has already caused US equities to fall 18% from this year’s peak, while assets from bonds to Bitcoin have also flowed.

According to Bloomberg Intelligence’s Fair Value Model, the S&P 500’s latest decline has nearly priced in recession risks over the next year. The stock benchmark would only need to fall another 4.4% to hit 3,760, which is the level at which investors are pricing a US economic slowdown, according to BI data.

Roman Dubczak, managing director and head of global investment banking at the Canadian Imperial Bank of Commerce, added that the job of central bankers is even more difficult as they unwind the bond-buying programs they have put in place. in place to lower market borrowing rates during times of crisis, at the same time as raising rates.

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