BoC: Heading back to neutral - AmpGFX

Greg Gibbs, Analyst at Amplifying Global FX Capital, suggests that their view is that the evidence from the Canadian economy in recent months suggests that a gradual return to policy neutrality over the coming year is a reasonable base case forecast.  

Key Quotes

“The Bank has estimated neutral policy rates to be between 2.5 and 3.5%.  With rates at 1.25%, it has at least five 25bp hikes to get back to its neutrality estimate.”

“As such, it will still see that, after a hike this week, that policy is significantly accommodative, and project above-trend economic growth.”

“In the April MPR, the Bank assumed that there was some slack in the economy; but not much.  It estimated that the output gap was between -0.75% and +0.25%.”

“While the unemployment rate is around a record low, the Bank thought there was still a bit of slack, and noted that wage growth was still somewhat below what it would normally be if there were no-slack.”