Bank of Canada Researchers Warn of Upward Pressure on Neutral Interest Rate

Bank of Canada researchers warn of upward pressure on the neutral interest rate due to Canada's declining economy and dollar compared to the US. The country's GDP per capita has shrunk by over 2% from 2018 to 2024, while the US has experienced 8% growth.

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Bijay Laxmi
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Bank of Canada Researchers Warn of Upward Pressure on Neutral Interest Rate

Bank of Canada Researchers Warn of Upward Pressure on Neutral Interest Rate

Researchers at the Bank of Canada are sounding the alarm about challenges facing the Canadian economy and the limitations of monetary policy as a guidepost. In a recent report, Matteo Cacciatore, Bruno Feunou, and Galip Kemal Ozhan warn of upward pressure on the neutral interest rate, citing concerns about Canada's declining, economy, dollar, mean trajectory compared to the United States.

Why this matters: The widening gap between Canada's and the U.S.'s economic performance has significant implications for Canada's long-term competitiveness and prosperity. If left unchecked, this trend could lead to a decline in Canada's standard of living and a decrease in its global economic influence.

The report highlights the growing disparity between the Canadian and U.S. economies. From 2018 to 2024, Canada's GDP per capita has shrunk by over 2%, while the U.S. has experienced growth of over 8% during the same period. This stark contrast underscores the weakening productivity of the Canadian economy relative to its southern neighbor.

The implications of this divergence are significant. If the Canadian economy had simply stayed flat since 2015, Canadians would be earning an extra $4,200 per capita. The widening gap between the two countries raises concerns about Canada's long-term economic competitiveness and the effectiveness of current policies.

In light of these challenges, the Bank of Canada researchers suggest that the central bank may be forced to cut interest rates at a faster pace than the U.S. Federal Reserve to support the struggling economy. However, this move could put downward pressure on the Canadian dollar, further exacerbating economic woes.

Some investors are already taking steps to protect their wealth in the face of a potential currency decline. Martin Pelletier, a senior portfolio manager at Wellington Altus Private Counsel Inc, states, "We've been taking to the foreign exchange markets to help protect our clients' wealth by boosting our U.S. dollar positioning."

The Bank of Canada's warning serves as a wake-up call for policymakers and highlights the urgent need for action to address the country's economic challenges. As the disparity between Canada and the U.S. continues to grow, it is crucial for leaders to implement strategies that will boost productivity, competitiveness, and long-term growth. The future of the Canadian economy hangs in the balance.

Key Takeaways

  • Canada's economy is declining, with a 2% drop in GDP per capita from 2018 to 2024.
  • US economy has grown 8% during the same period, widening the gap between the two countries.
  • If Canada's economy had stayed flat since 2015, Canadians would be earning an extra $4,200 per capita.
  • Bank of Canada may need to cut interest rates faster than the US Federal Reserve to support the economy.
  • This could lead to a decline in the Canadian dollar, further exacerbating economic woes.