| LONDON, Sept 14
LONDON, Sept 14 The reduced potential for global
economic growth and resultant lower neutral interest rates could
pose risks for financial stability, a senior Bank of Canada
official said on Wednesday.
Economic growth since the global financial crisis has
repeatedly disappointed economists, Senior Deputy Governor
Carolyn Wilkins said, noting that the Bank of Canada's own
forecasts overestimated global growth by an average of a half a
percentage point each year in the past four.
The central bank estimates potential global economic growth
has declined from a peak of about 5 percent in 2005 to just over
3 percent this year, Wilkins said, speaking before the Official
Monetary and Financial Institutions Forum in London.
That lower growth environment drives down the neutral rate
of interest, the level where interest rates would be if the
global economy were operating at full potential, she said.
"While we typically link financial stability risks to
unsustainably high growth, slower growth and lower returns can
also add to vulnerabilities in the financial system," Wilkins
said in prepared remarks.
Those risks could materialize in a number of ways, she said,
including the possibility that households will see longer and
more frequent periods of shrinking income, or that slower growth
and lower returns could prompt investors to take on more risk.
The central bank has lowered its estimate for the neutral
rate for Canada in recent years and it is now at about 1.25
percent, down from about 3 percent in the early 2000s, Wilkins
Nonetheless, with Canada's benchmark rate at 0.5 percent,
"we judge monetary policy to be quite stimulative, although less
so than it would have been a decade ago when the neutral rate
was higher," Wilkins said.
After cutting interest rates twice last year to offset the
slump in oil prices, the Bank of Canada has held rates at 0.5
percent since July 2015.
Although the bank warned in its policy statement last week
that the economy could be weaker than it had anticipated just
two months ago, the bank is expected to keep rates where they
are until 2018.
(Reporting by David Milliken, writing by Leah Schnurr; editing
by Diane Craft)