September 14, 2016 / 10:52 AM / 2 years ago

Bank of Canada: slow global growth a risk to financial stability

LONDON, Sept 14 (Reuters) - 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 said.

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

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