The Bank of Canada raised the neutral rate while keeping the overnight interest rate at 5%. Along with the decision to raise the neutral rate in Canada, the BoC also decided to keep interest rates unchanged on Wednesday. However, it also gave new information about its view on future rates.
Bank of Canada Raised the Neutral Rate
The neutral rate in Canada is where the central bank’s monetary policy does not push the economy too much in either direction. Sheila Block, an economist with the Canadian Centre for Policy Alternatives, discussed the Bank of Canada’s neutral rate decision, saying that the neutral rate is similar to the “Goldilocks” rate. It is where the economy can grow steadily without causing inflation to rise too quickly.
The Bank of Canada’s neutral rate is estimated to be between 2.25% and 3.25%, up from the previous range of 2% to 3%. Although the neutral rate in Canada is not an exact number and is given as a range, it is still a key factor in the central bank’s monetary decisions. According to Sheila Block, an economist with the Canadian Centre for Policy Alternatives, Canadian consumers, especially those with debt, should pay attention to it.
She explained the Bank of Canada’s neutral rate and said that central banks aim to find the right spot where their rate decisions do not trigger a recession or fuel inflation. As the Bank of Canada raised the neutral rate, interest rates may end up higher after they finish cutting compared to what was previously expected.
However, it is essential to note that The Bank of Canada’s neutral rate does not tell us when or how quickly those rate changes will happen.
The Rationale Behind Bank of Canada’s Neutral Rate Decision
Block explained that the Bank of Canada’s neutral rate is a sign that the bank believes rates cannot drop as much as it thought before. The Bank of Canada raised the neutral rate, which the BoC governor addressed recently in a press conference. He said that while the neutral interest rate is considered in their models, it does not heavily influence immediate monetary decisions.
As the Bank of Canada raised the neutral rate, Block believes the main question is how much it will continue to rise. Block, talking about the neutral rate in Canada, pointed out that various factors are reshaping the long-term economic landscape. These factors include growing government debt and the need for investments due to climate change.
Block, discussing the decision on the Bank of Canada’s neutral rates, believes the neutral rate might increase further. She sees many inflationary pressures building up, making maintaining a 2% inflation rate target challenging.
Canadians had gotten used to low interest rates before the pandemic, but Block said that their hopes of returning to those levels had gone down since then. Avery Shenfeld and Ali Jaffery at CIBC predicted the decision about the neutral rate in Canada. They also believed that the US Federal Reserve would eventually raise its neutral rate.
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