Posthaste: Economists feel around for Bank of Canada end rate as whirlwind year of cuts comes to close
It’s been an action-packed year for the Bank of Canada, with policymakers cutting interest rates five consecutive times by a total of 175 basis points.
With the book closed on 2024 and 2025 likely the year this rate-cutting cycle comes to a close, economists took a crack at where they see the neutral rate — which neither stimulates nor dampens growth — and the terminal rate — best suited for the long term — landing.
The Bank of Canada’s rate cut on Dec. 11 — a 50-basis-point whopper — brought its benchmark lending rate to the top end of its neutral rate of 2.25 per cent to 3.25 per cent.
Getting a fix on the neutral rate is important because it provides clarity on where interest rates will come to rest after policymakers began cutting in June and never looked back.
So far, nailing down the neutral rate has proved elusive for the Bank of Canada. Governor Tiff Macklem admitted a few months ago that policymakers might have to “discover” neutral.
“We don’t know exactly the pace,” Macklem said at an event in Toronto in October. “We don’t exactly know where the landing is.”
But with the Canadian economy set for disappointing growth next year and other economic challenges looming, including tariffs levied on exports by the United States and a population cut, most economists think interest rates have a lot further to fall before they hit neutral.
“Weaker potential growth in 2025 and 2026, likely below one per cent in both years, suggests that the neutral interest rate for this period will likely be below the BoC’s estimates,” Charles St-Arnaud, chief economist at credit union Alberta Central, said in a year-end analysis. “The downside pressures on the neutral rate are dominant.”
He said that means interest rates will remain
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