MNI: BOC Research Still Sees Canada Neutral Rate at 2.5%-3.5%

By Yali N'Diaye

     OTTAWA (MNI) - A week before the Bank of Canada publishes its updated

economic projections, a staff research paper released Tuesday found their

estimate for Canada's neutral nominal policy rate was unchanged from April.

     The staff looked at four approaches to estimate the nominal rate, and

concluded the neutral rate is still between 2.5% and 3.5%, where it has been

since April 2017, when it was lowered from 2.75%-3.75%.

     This suggests that July 11 projections will assume the same neutral rate as

in April.

     --CLOSED ECONOMY

     One of the four approaches is in a closed economy, where foreign factors

are not taken into account. The neutral rate would then be 3.5% to 3.75%.

     However, such Neoclassical growth model "implies an unrealistically strong

relation between the real neutral rate and potential output growth," the staff

said.

     Overall, the four approaches would point to a neutral range of 2.5% to

3.75%. Since the upper limit results from the Neoclassical growth model, and

given its shortcomings, including not taking global factors into account, the

staff estimates that an upper limit of 3.5% is more "appropriate."

     Down the road, the Bank staff plans to "expand the neutral-rate toolbox to

incorporate a formal role for precautionary savings."

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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