Survey Suggests Bank of Canada’s Neutral Rate May Settle at 2.75%

The financial market anticipates that the Bank of Canada will reduce its policy rate to 2.75% by June 2025 and hold it steady through the end of 2025 and into 2026, as indicated by a survey the central bank released on Monday.

This quarterly survey, conducted from September 18 to 27, gathered insights from 30 financial market participants. Since then, the central bank has made a 50-basis-point cut to its overnight rate, lowering it to 3.75%.

The Bank of Canada currently estimates its neutral rate—the interest rate that neither stimulates nor restricts economic growth—within a range of 2.25% to 3.25%. However, it has not pinpointed a specific target. The median of 26 responses in the survey places the long-term nominal neutral rate at 2.75%.

Bank of Canada Governor Tiff Macklem acknowledged the challenge of pinpointing this rate, suggesting the bank might need to “discover” it. “We don’t know exactly the pace. We don’t exactly know where the landing is,” Macklem said during a conference in Toronto last week.

The survey also gathered market participants’ projections for inflation and overall economic growth in Canada. The median forecast among 27 responses sets the consumer price index at 2.2% by year-end, dropping to 2% in 2025. The Canadian economy is expected to grow by 1.5% in 2024 and 1.9% in 2025. The Bank of Canada’s own forecast projects 1.2% annual growth in 2023 and 2.1% in 2025.

Only 20% of respondents foresee a recession in the next six months, though they highlighted geopolitical risks as a primary downside for growth. A strengthening housing market was noted as a potential upside risk.