BOC: Neutral Rate Stays Steady

There had been some speculation the BoC could change its estimates for neutral rates at this meeting (they typically re-examine it every April), with some analysts seeing risks they would up the range by 25bp and others seeing it lowered by 25bp. Instead, the BoC left it steady at 2.25-3.25%, meaning that the current overnight rate remains exactly in the middle of the range (see section in MPR)

• The MPR takes note of the 2 trade war scenarios described elsewhere - noting that potential growth in Canada is set to slow either way. However, they conclude that the Canadian neutral rate is unchanged vs last year's estimate, due to the strong link between the Canadian and US neutral rates. In turn, the report sees US neutral rates unchanged vs last year in either trade war scenario:
• "In Scenario 1, tighter immigration policy and rising macroeconomic uncertainty offset the impact of stronger productivity growth. In Scenario 2, potential output growth is weaker than in Scenario 1, and the ratio of government debt to gross domestic product is smaller. Both factors weigh on the US neutral rate but are not large enough to move the range."
• In this regard, the MPR also notes that there are risks the Canadian and US neutral rates could decouple in future, implying a higher Canadian neutral rate: "Structural changes, such as the impact of further isolation of the US economy, could affect the link between the US and Canadian neutral rates. If Canadian borrowers become less willing or find it harder to access funding in US capital markets, they would need to turn to other markets. Since the US capital market is the world’s largest and most liquid, this could lead to higher interest rates for Canadian borrowers. This would cause the Canadian neutral rate to rise."