An Update on the Neutral Rate of Interest

The neutral rate of interest is the real policy rate that prevails when an economy's output is at its potential level and inflation is at the central bank's target, after the effects of all cyclical shocks have dissipated. The neutral rate serves as a benchmark to gauge the degree of monetary stimulus in place and provides a medium- to long-run anchor for the real policy rate. Estimates of the global neutral rate have been steadily falling over the past few decades. These point estimates are subject to considerable uncertainty. Several factors affecting the global economy's supply of savings and demand for investment determine the evolution of the global neutral rate. In articles and speeches in 2014 and 2015, the Bank of Canada documented how the evolution of those factors had explained the decline of the neutral rate until then. In this article, we review those factors to reassess our view of the neutral rate.