How much will the Bank of Canada raise interest rates? Economists are watching this index to see – National

When investors consider how much more Bank of Canada will tighten, basic level inflationary potentially a better sign than the central bank’s heavily scrutinized estimate of neutrality interest rateeconomists say.

The Bank of Canada last week raised its benchmark interest rate to 3.25% – a 14-year high and the highest policy rate among central banks that oversee the 10 most traded currencies. .

It leaves policy rates above the two to three percent range that the central bank estimates to be a neutral setting, or a level where monetary policy is neither stimulating nor pressuring the economy. economic.

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Rising rates add financial ‘burden’ but necessary to fight inflation: Bank of Canada

The BoC and investors see a move above the neutral rate as the destination for interest rates. However, economists say the neutral level may be underestimated in the short term.

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“Precisely pinpointing a neutral rate in this environment is like trying to hit a moving target while blindfolded,” said Royce Mendes, head of macro strategy at Desjardins.

“In fact, the only way the central bank will know when rates are in restricted territory is after the economy shows more signs of stress.”

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The BoC defines the neutral rate as the real neutral rate plus two percentage points for inflation. The problem is that inflation is no longer near 2%, and not just in Canada.

Some Federal Reserve officials have said that the US neutral rate could be higher than estimates in the current environment. On Wednesday, US consumer price data dampened investor hopes for a easing of price pressures.

Meanwhile, the Bank of Canada has acknowledged the shortcomings of the neutral concept.

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“There is no magic formula that gives us a neutral rate,” Senior Deputy Governor Carolyn Rogers said last Thursday. “A lot of it is state dependent or environment dependent.”

Canada’s key inflation rate stood at 7.6% in July, while all three of the BoC’s preferred measures of core inflation were at or above 5%. The central bank’s latest forecast, in July, is that inflation will remain above the 5% target through the end of 2024.

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“To fully contain inflation, tightening cycles often need to see short-term interest rates rise above core inflation,” said Doug Porter, chief economist at BMO Capital Markets. , chief economist at BMO Capital Markets, said in a note.

Money markets seem to agree on the need for more restrictive interest rates, expecting the BoC to tighten by about 3/4 of a percentage point in the coming months.

“There is a lot of uncertainty around the peak policy rate,” said Derek Holt, head of capital markets economics at Scotiabank. “The best guess of where they land is something that will approach (4%) or slightly exceed.”

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