Canada’s Neutral Rate May Be Lower Than Central Bank Estimate, Economist Says

An economist at Rosenberg Research said the Bank of Canada’s estimate of the neutral interest rate may be too high. According to Jin10, Rosenberg Research economist David Watt said Canada’s neutral rate could be about half a percentage point lower than the Bank of Canada’s current estimate. The Bank of Canada has estimated the neutral rate at 2.25% to 3.25%. Watt said a declining population, two decades of stagnation in capital stock growth, and persistent uncertainty over U.S. trade policy have lowered Canada’s neutral-rate estimate by about 50 basis points to a range of 1.75% to 2.75%. He added that the Bank of Canada’s 2.25% policy rate may be too high, and that raising rates to guard against inflation risks from higher oil prices would be a mistake.