As expected, the Bank of Canada held its policy interest rate at 5% for the sixth consecutive time at its April 10 meeting. The Bank’s statement reflected a more subdued tone, highlighting a slowdown in underlying inflation and a loosening of labour market conditions. While slowing inflation is “becoming more broad-based across goods and services,” the Bank is looking to see a sustainable decline in core CPI (Consumer Price Index).
Economic growth, however, is expected to be stronger than previous projections, with global growth for 2024 revised upward by 0.3% to 2.8% and pegged at 3% for 2025. Domestically, growth prospects have significantly improved, with a forecast of 1.5% for 2024 compared to the previous outlook of 0.8%.
As part of its statement, the Bank provided updated estimates on the neutral rate of interest and potential growth. The neutral rate of interest, while not directly observable, is a crucial factor in guiding monetary policy decisions. It represents the policy rate that maintains the economy at its potential output level while ensuring stable inflation.
The Bank of Canada uses four different models to estimate Canada’s neutral rate of interest. Due to the variety of models used, the Bank has published a 100 basis point band for the Canadian neutral rate. Given Canada’s status as a small open economy, most of these models rely on the US neutral rate as a key input. Consequently, Canada’s rate tends to track closely with the US rate. Last year, the Bank signaled a potential “risk” of a higher neutral rate. Not surprisingly, the latest Monetary Policy Report revealed a 25 basis point increase in the neutral rate.
The Bank’s estimate of the neutral rate has increased, but there remains a wide range of uncertainty surrounding this estimate. While the neutral rate is a useful tool for assessing monetary policy stance, it serves more importantly as an input for the Bank’s forward-looking view on the economy rather than for setting specific monetary tactics. As the Bank eases its policy, it will closely monitor incoming data and the direction of the economy.
While potential growth for 2024 has been raised, primarily driven by robust population growth, projections for 2025 and 2026 have been revised downward due to expectations of a slowdown in population gains.
While the Bank hasn’t declared victory on inflation yet, we continue to expect a rate cut as early as June.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
The March 27th edition of CMI’s Housing Affordability Watch highlighted various potential initiatives that CMHC could explore to improve efficiency in the housing finance system and help restore affordability to Canada’s housing market. In a series of posts, we’re delving into each of these options in detail.
In the first instalment of our series, we looked at the US mortgage-backed securities (MBS) market to identify best practices that could be applied to Canada’s National Housing Act Mortgage-Backed Securities (NHA-MBS) program. In our second instalment, we explore the potential benefits of establishing an insured mortgage repo (repurchase) facility and the infrastructure that would be required to support it. Read it here: Developing Infrastructure to Support Insured Mortgage Repo
Independent Opinion
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