What’s the NNR and Why Does it Matter?

The Nominal Neutral Rate is an estimate of the economy’s equilibrium interest rate — essentially where monetary policy interest rate decisions “neither spurs nor constrains” inflation. It’s more a guideline than a set-in-stone number. The Bank of Canada has indicated the range for its neutral rate is between 2.25% and 3.25%, but has not provided a specific target.

Forward-looking guidance offered by Bank of Canada governor Tiff Macklem indicated that the BoC will likely pivot to Neutral before re-focusing whether to go over or perhaps go lower than the Neutral Policy Rate. Without that over, a pause in Key Rate cuts is likely until a neutral policy rate is achieved.

Canadian employment and inflation data, as well as U.S. policy adjustments and potential trade tariffs, will likely have the Bank of Canada looking to how the Key Rate can go without spooking another round of inflation. The BoC at the top of the NNR (with market beliefs likely below that rate) will finally decide whether to lower further. If inflation slows, the Bank of Canada will cut its Key Rate to 2.5% by June. If inflation is still high, they may keep the BoC’s NNR steady.

The Key Rate currently sits at 5%, following the January 24th BoC announcement. While inflation continues to drop, the BoC has not indicated how far future cuts will go.