adminBank of Canada’s Governor, Tiff Macklem, expressed concerns over the bank’s decision to maintain the neutral rate of interest during their annual review. Speaking at a Senate economy committee meeting on Wednesday, Macklem suggested a potential gradual increase in this theoretical level of borrowing costs that neither accelerates nor hinders economic growth.
Macklem emphasized that such a potential rise should be evaluated considering factors like growing fiscal deficits, aging demographics, and increased renewable energy investments. He expressed discomfort when policymakers decided to keep Canada’s nominal neutral rate estimate steady between 2% and 3% after their annual review in April.
The Bank of Canada may view the current 5% interest rates, which are at a record high in 22 years, as less restrictive than previously assumed. This perspective aligns with observations made earlier by then-deputy governor Paul Beaudry.
Macklem warned that an increase in the neutral rate could lead to an overestimation of the tightness of monetary policy. This could result in unexpected inflation and necessitate an increase in interest rates to meet the inflation target. His comments indicate a potential shift in the Bank’s monetary policy approach, which could have significant implications for the Canadian economy.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Read the full article here
