Bank of Canada’s Neutral Interest Rate Could Be 2.75% Survey Finds
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Bank of Canada’s Neutral Interest Rate Could Be 2.75% Survey Finds

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The financial market believes that the Bank of Canada will cut its policy rate to 2.75 per cent by June 2025, before holding it there for the remainder of 2025 and into 2026, according to a survey released by the central bank on Monday.

Background Information

  • The quarterly survey was conducted between September 18-27 and is based on responses from 30 financial market participants.
  • Since then, the central bank has made a 50-basis point cut to its overnight rate, bringing it down to 3.75 per cent.

Survey Results

  • The median of 26 responses in the survey has the long-term nominal neutral rate at 2.75 per cent.
  • The neutral rate represents a theoretical level of borrowing costs that neither encourages nor discourages economic growth.
  • Last week, Bank of Canada governor Tiff Macklem stated that the central bank might have to "discover" the neutral rate.
  • He emphasized that the central bank doesn’t exactly know the pace or where the landing is.

Inflation and Economic Growth

  • The survey also took market participants’ pulse on inflation and the Canadian economy.
  • The median of 27 responses has the consumer price index at 2.2 per cent by year-end and two percent for 2025.
  • The Canadian economy will grow by 1.5 per cent in 2024 and 1.9 per cent in 2025, according to the survey.

Recession Risk

  • Only 20 per cent of respondents believe a recession will occur in the next six months.
  • Market participants had geopolitical risk as a major downside to growth and a stronger housing market as a major upside risk.

Takeaways

  • The Bank of Canada has indicated that its neutral rate is between 2.25 per cent and 3.25 per cent, but hasn’t provided a specific target.
  • The survey results suggest that the central bank may be heading towards a lower interest rate environment in the coming months.

The survey provides valuable insights into market participants’ expectations for the Canadian economy and monetary policy. However, it’s essential to note that these are just predictions and not concrete forecasts.

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These articles offer more information on the Bank of Canada’s monetary policy and its impact on the Canadian economy.

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