The Bank of Canada's 25bps slice in the overnight rate
to 2.75% on Wednesday leaves policy exactly in the middle of its official estimate of neutral rates -- a range of
2.25% to 3.25%, noted Bank of Montreal (BMO).
The cut brought overnight rates almost through the five-year Government of Canada yield (currently around 2.7%) for the first time in 2.5 years, or since September 2022, said the bank.
The big inversion from overnight rates to five years was truly unusual, stated BMO.
However, the bank doesn't believe the BoC will stop there.
Given the trade war 'crisis', it's unlikely rates will stay at neutral.
In addition, even the official view on neutral is likely to change in April. BMO expects the BoC to shave its view to a 2%-to-3% range at the next Monetary Policy Report,
largely due to much slower population growth and so lower potential gross domestic product growth.
The average overnight rate in the past 30 years has been
precisely 2.5%, suggesting that there are certainly
worse estimates of what's "normal," pointed out the bank.
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