Bank of Canada staff hold Canada neutral-rate estimate; U.S. range raised on productivity, AI

A new Bank of Canada staff paper kept its estimate of Canada’s nominal neutral interest rate unchanged at 2.25% to 3.25%, while raising its U.S. estimate to 2.50% to 3.50% from 2.25% to 3.25% a year earlier.

The divergence matters because neutral-rate estimates help economists and investors judge whether current policy settings are restrictive, accommodative or roughly in line with a long-run equilibrium level. The neutral rate is not a rate central banks target directly. Instead, as the Bank of Canada staff paper says, it is “where the Bank expects the policy rate would settle once output is at its long-run potential level and inflation is at target, after the effects of all cyclical shocks have dissipated.”

The update comes from a Bank of Canada staff analytical paper, “Assessing the US and Canadian neutral rates: 2026 update,” dated May 2026 and last updated May 25. It is staff research, not an official policy decision by the central bank’s Governing Council.

In the paper’s headline assessment, staff wrote: “We assess the Canadian nominal neutral rate to be in the range of 2.25% to 3.25%, unchanged from our assessment in 2025. We assess the US nominal neutral rate to be in the range of 2.50% to 3.50%, somewhat higher than the range of 2.25% to 3.25% reported in the 2025 assessment.”

The U.S. revision higher mainly reflects “a stronger outlook for US potential output growth,” according to the paper. More specifically, staff said stronger productivity growth, backed by artificial intelligence investment and wider adoption, was doing much of the work in two of its models. “Strong productivity growth in the United States, supported by investment in artificial intelligence (AI) and its broader adoption, drives most of the upward revision to the estimate of the neutral rate in the OLG and RANCG models,” the paper said.

That AI link came with caution. The paper noted that the technology’s broader economic effects are still uncertain, including possible effects on labor’s share of income and on inequality.

Canada’s estimate was left unchanged for a different reason: forces pushing in opposite directions largely offset each other. Staff said lower long-term population growth put downward pressure on Canada’s neutral rate, while upward revisions to long-term productivity growth pushed the other way. A higher U.S. neutral rate also added some upward pressure to the Canadian estimates in the models, but not enough to shift the overall Canadian range.

As a methodological update, the paper said staff added a new Canadian cross-check in 2026, a trend-cycle Bayesian vector autoregressive model, or BVAR. Staff said that model was broadly aligned with the other approaches.

The estimates also help frame current policy settings. The Bank of Canada held its target for the overnight rate at 2.25% on April 29, 2026. In the United States, the Federal Reserve held the federal-funds target range at 3.50% to 3.75% at its April 28-29 meeting.

Still, the paper stresses that the neutral rate cannot be observed directly and must be estimated with “considerable uncertainty.” Its ranges are rounded to the nearest 25 basis points. The document also carries the Bank of Canada’s standard disclaimer that staff research is produced independently from the Governing Council, and that the authors’ views may differ from official Bank positions.