Did Macklem Misdirect on the Neutral Rate?

Canadians shouldn't “spend a lot of time thinking about the neutral rate,” BoC chief Tiff Macklem advised in his June 5 press conference.

But it's okay for him to spend a lot of time thinking about it.

In the Bank's own words, the neutral rate is:

In other words, it's important.

In fact, it's so crucial that the BoC estimates it regularly, publishes those estimates for all to see, comments on it in every Monetary Policy Report, and uses those estimates as a core reference rate for its rate modelling.

Jargon Buster: The "neutral rate" is the theoretical happy place for the BoC's policy rate. It's the Goldilocks overnight rate that keeps the economy operating at full capacity with no inflation pressure. The Bank currently estimates it at 2.75%, give or take 50 bps.

When rates go bonkers - sky-high or rock-bottom - the neutral rate becomes the North Star for navigating back to normalcy. It's essentially the BoC's GPS after a wild rate cycle.

But Canadians shouldn't worry their pretty little heads over it. Just trust the experts, they suggest.

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