US-Canada Neutral Rate Gap Narrows Amid Different Economic Sensitivities

The neutral interest rate is a crucial concept in monetary policy, as it represents the level at which an economy can grow without being hindered or helped by interest rates. However, measuring this rate accurately has proven to be difficult for economists. A recent analysis reveals that the neutral rates of Canada and the US have diverged over the past few years, with the American economy able to tolerate higher real and nominal yields than its Canadian counterpart.

The disparity in neutral rates can be attributed to several factors. One reason is that the US economy has been able to maintain a strong growth path despite higher interest rates, whereas Canada's economy has been more sensitive to rising rates. Federal Reserve Governor Lisa Cook emphasized this point during a recent speech, stating that 'inflation is too high' and that she considers the risks to inflation to be greater than those related to employment.

Meanwhile, Fitch Ratings suggests that further gains in the yen are dependent on additional interest rate hikes by the Bank of Japan. This implies that the relative monetary policy positions of the US and Japan may not be the primary drivers of the yen's weakness.