Rate expectations: What’s the neutral rate, and why did the Bank of Canada raise it?

By The Canadian Press on April 10, 2024.

OTTAWA – The Bank of Canada’s interest rate decision on Wednesday didn’t bring cuts, but it did bring new insight into where the central bank thinks interest rates may be headed.

The bank kept its overnight interest rate steady at five per cent, but it raised something else: its nominal neutral interest rate.

The neutral rate is the rate at which the central bank’s monetary policy is neither stimulating nor holding back the economy.

That metric is now estimated to be between 2.25 per cent and 3.25 per cent, up from two per cent to three per cent in the central bank’s last report.

Despite the uptick, Royce Mendes, managing director and head of macro strategy at Desjardins, sees the bank’s projection as still relatively optimistic, given that many market watchers think it could be higher.

The neutral rate is now the same as it was for much of 2019, when the overnight rate was 1.75 per cent.

This report by The Canadian Press was first published April 10, 2024.

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