The Bank of Canada's fight against inflation boils down to two choices, according to the chair of one of the country's largest institutional investors. Neither is good.
Mark Wiseman, chair of the Alberta Investment Management Corp. (AIMCo), says Canada's central bank can stay the course on aggressive interest rate hikes, driving the economy into what could be a "deep recession."
Wiseman, whose pension plan manages more than $136 billion in assets, called this choice "Door A" at a speaking event hosted by the Canadian Club of Toronto. Behind "Door B", a plan to abandon the two per cent inflation rate target held by many central banks. This, he says, would allow higher prices to become entrenched in the economy longer term, hurting financially vulnerable Canadians, like those on fixed incomes.
"They have a bad choice, and on the other hand they have a bad choice," Wiseman told an audience on Thursday.
"Central banks, particularly the Fed and the Bank of Canada, are indicating 'Door A.' If I was a central banker, I would be doing the same thing. Because until you choose 'Door B', the best thing to do is make everybody think you're going to 'Door A.'... We'll see by the end of this year if there is a pivot."
Federal Reserve officials said on Thursday that they will continue raising interest rates in a bid to restrain high inflation. The Bank of Canada is widely expected to hike its policy key rate again when officials meet next month.
"It's really tough out there," Wiseman said, adding that central banks around the world are facing inflationary pressures from an array of structural issues that make it tough to coordinate policy moves with international peers. He points to soaring energy costs in Europe resulting from Russia's war in Ukraine, and a weak Chinese economy that would benefit lower borrowing costs.
"We actually have the world moving in different directions," Wiseman said. "If you think currency markets were roiled in the last few weeks, hold on tight, because it ain't going to end."
Editor Note: The original headline has been changed to avoid the potential for headline readers to misinterpret Mr. Wiseman's comments as critical of the Bank of Canada.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.