The Bank of Canada the interest rates are likely to remain “new neutral” – the level that would sustain the economy at full capacity. The rate benchmark has been at 1% for more than four years. Senior Deputy Governor of Bank of Canada, Carolyn Wilkins, stated in the last month that the nominal neutral rate has dropped to a range of 3 percent to 4 percent even further than they have in the past.
Will Interest Rates Rise or Fall in the Coming Years?
The aftermath of the financial crisis has kept a lid on the interest rates in the country, which makes the interest rates low by historical standards. The indication of interest rates for next two years is believed to average “just below 2 per cent” – a full percentage point lower than in the decade prior to the recession.
“The bottom line is that potential output growth in Canada and other industrialized economies will be lower than it was in the years leading up to the crisis,” said Carolyn Wilkins, Senior Deputy Governor.
Investors are wondering if interest rates are going to go up. The prime rate for private lenders sits at 3.0 per cent. The slow growth outlook is restraining Canada investment. The shifting of debt from international investors to domestic investors is one prime factor contributing to the lower bond yields as today it stands at 17% – dropping from 30%. It is important to reserve giving advance notices on the direction of the interest rates in the future when rates are at their lowest possible point, says Stephen Poloz, the governor of BoC.
Economists at TB Bank are satisfied with their forecast, by affirming that interest rate hikes are “a long way off on the horizon, likely in the second half of 2015”.
Concluding Viewpoints on Economic Growth and Interest Rates:
The Bank of Canada has a neutral stance on interest rates, suggesting there is an equal chance it will raise or lower rates. The rise or fall of the rates will depend on the performance of economy in Canada and a weakening picture may prompt the bank to actually cut its rate to below 1 per cent.
For now, most of the economists believe that by mid-2015 the gap is likely close, or slightly later. However, there are also different viewpoints on when that will prompt the long-awaited rise in interest rates.
Ms Wilkins does not view monetary policy as stable enough to deal with the financial risks and states that the hikes in interest rates are likely to upset the economy further because of elevated household debt.
In other words, a rate hike by the Bank of Canada could come even later than many economists have forecast.