11 July 2011
Actually, the “neutral policy rate” refers to the central bank’s overnight rate that neither stimulates nor restrains the Canadian economic growth. It tends to prevent the economy from excessive supply or demand and keep the inflation rate close to the Bank of Canada’s 2% target.
But in the same time, according to Mark Carney, the overnight target doesn’t have to coincide with the “neutral policy rate”, even in case of a stable and fully normalized economy.
Meanwhile, many economists believe that slow growth and today’s inflation won’t cause the big rate increases. The projection for neutral policy rate is down, that’s why the risk of variable rate hikes is also falling. It seems that variable mortgages are quite safe choice at this period of a rate cycle.