Julie Gordon and FergalSmith

OTTAWA (Reuters). Canada’s central banks has indicated that they will be accelerating with a string of large-scale hikes to reduce inflation. This could increase the chance of the economy falling into recession. But economists believe it would still be worth it if rapid price increases are not ensconced.

The Bank of Canada increased its policy interest rate by 0.5% to 1.5% last week. This is its second successive 50-basis point hike.

This could lead to more movements before pausing or larger than 50-bp rises. Or, an end rate at neutral. That is the range of 2%-3% where interest rates do not stimulate or weigh down growth, said Deputy Governor Paul Beaudry.

Economists believe that a strong and front-loaded attack by the Bank of Canada on domestic demand will slow down inflation, which should prevent it from spiraling out of control.

It is delicate and any misstep could severely impact the economy, even though key services, such as travel, are recovering. The worst-case scenario could see Canada plunge into a recession.

Andrew Kelvin of TD Securities, Chief Canada Strategist, stated, “To me, the recession risk is high because we look at such a strong monetary policies response being required in order to take inflation back towards target.”

They need to take action quickly. This makes it difficult to predict the impact rate hikes will have on the economy.

Canada’s flat yield curve indicates that investors believe in a slowdown. The gap between 10- and 2-year bonds yields was at 14 basis points Wednesday. This is the narrowest spread of the Group of Seven members.

As rate increases have reduced buying power, the housing market has seen a sharp decline in its importance as a major driver for Canada’s economy. The country has seen its export volume drop by 4.9% this year so far, an increase that was masked in part by high commodity prices.

However, inflation continues to run at 6.8% with the potential for further increases. Canada’s unemployment rate has reached a new record low. Businesses report that they are receiving more business than their capacity, which makes it even more important to take a strong response.

Beaudry last week stated that “Do a bit too much and inflation will keep going.” You could cause the economy to go into recession if you do it too often. That’s why we try to keep it in the middle.

The money markets bet that the Bank of Canada would raise its policy rate by 3.25% before the year ends. This is the highest level since 2008. It will also go three percentage points higher than January’s 0.2%. In 2017/18, the interest rate reached a record high of 1.75%.

Canada has one of the highest levels of household debts in the G7, and this rapid pace may shock its economy. The April sales of homes plunged 12.6% from March. However, the price effect of rapidly cooling demand is still being felt. Economists suggested that the Bank might be open to risking a hard landing, provided it maintains consumer expectations.

Stephen Brown (senior Canada economist, Capital Economics) stated that the Bank of Canada’s communication suggest it won’t be affected by the second consecutive drop of home sales in May of double-digits.”

“This raises concerns that they will pursue a tighter policy approach than what is necessary to drive house prices down and create a severe recession.

Beaudry answered reporters directly when asked if it was willing to create a recession.

We will bring inflation down to 2%, that’s the bottom line. “We’ll do everything necessary to get there,” said he.