The Globe and Mail reports in its Thursday edition that less than two weeks ago, Bank of Canada Governor Stephen Poloz reaffirmed his belief that rates needed to continue higher, albeit at a more uncertain pace. The Globe's David Parkinson writes that 13 days later the bank is now openly stating that the economy needs the stimulus of below-neutral interest rates. The BOC has invited the question of whether the current below-neutral levels are stimulative enough to buffer deteriorating conditions. The BOC will not have an informed answer to that until it has a couple of key pieces of information in its hands.
One will come at the BOC's next rate decision and quarterly Monetary Policy Report in April, when it updates its estimated range for the neutral rate of interest -- the level at which interest rates neither stimulate nor dampen economic growth. Some experts have speculated that the neutral rate is somewhat lower than the BOC's current estimate of 2.5 per cent to 3.5 per cent. That would imply that the BOC's current interest rate of 1.75 per cent may already be very close to this "new" neutral -- which would strengthen arguments that for rates to be meaningfully stimulative, they may have to move lower.
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