Bank of Canada has zero per cent success rate controlling inflation at present level without recession: analysis

Recession triggered in every instance over past 60 years
July 5, 2022

OTTAWA—The Bank of Canada has never been successful engineering a “soft landing” from high inflation by rapidly hiking interest rates, according to a new historical analysis released today by the Canadian Centre for Policy Alternatives. 

In fact, every time over the past 60 years that interest rates were hiked quickly to bring down inflation by the amount currently targeted by the Bank of Canada, it resulted in a recession. 

“Using rapid interest rate hikes to deflate the economy is a blunt, non-targeted approach that creates tremendous collateral damage,” says analysis author and CCPA Senior Economist David Macdonald. “Any way you slice it, a fight against inflation using interest rates will also be a fight against jobs.” 

The Bank of Canada is currently pursuing a strategy to tackle inflation by raising interest rates, targeting a return to two per cent inflation, which would be a 5.7 per cent reduction from May’s 7.7 per cent inflation rate. There were three historical instances where inflation fell at least 5.7 per cent. Each of those was preceded by large Bank of Canada interest rate hikes and all resulted in a recession, meaning the success rate of a “soft landing” was zero per cent. The average number of jobs lost during these periods, adjusted for today’s population, would be 850,000, with the worst case being 1.3 million.

“If a pilot told me they’d only tried a particularly tough landing three times in the last sixty years without success, that’s not a trip I’d want to be on,” adds Macdonald. “Unfortunately, that’s the plane we’re all aboard now and 850,000 jobs are on the line” 

If the Bank of Canada’s inflation target were four per cent, instead of two per cent, there has been a 33% chance historically of getting inflation down the required amount without a recession. When this was done successfully, it was in the absence of major interest rate hikes.

“The federal government has abdicated all of the responsibility for controlling inflation to the Bank. However, it can have plenty of impact on prices and needs to act immediately to forestall a Bank of Canada engineered recession. The government could: tighten mortgage regulation for investors to affect housing prices, lower fees on programs like the national child care plan, and encourage the provinces to limit rent increases, among other strategies.”

Macdonald’s analysis, Canada’s fight against inflation: Bank of Canada could induce a recession, can be found online here.


For more information and interviews contact: Alyssa O’Dell, CCPA senior media and public relations officer, at 343-998-7575 or [email protected].

The CCPA is an independent, non-profit charitable research institute founded in 1980.