Following the Bank of Canada’s recent decision to cut interest rates, a former Bank of Canada governor predicts interest rates to settle around three per cent over the coming years.

Last week Canada’s central bank moved to lower its benchmark policy rate by 25 basis points to 4.75 per cent while signalling further cuts. The move came as Bank of Canada officials said they have a higher degree of confidence that inflation is trending toward the central bank’s two per cent target. 

In an interview with BNN Bloomberg on Friday, David Dodge, a senior advisor at Bennett Jones and former Bank of Canada governor, said the move makes “good sense” and the timing of future cuts will depend on “the continued progress on inflation.” 

“Nevertheless, we think we'll be by 2026 pretty close to (a) two per cent (inflation rate) and so we ought to be back to a Bank of Canada policy rate that is close to neutral. And the new neutral is higher than the old one,” Dodge said. 

“And so what we're arguing is that rates will come back down, but probably only to about three per cent by 2026,” Dodge said

According to a report from the Bank of Canada released in April, Canada’s neutral rate is estimated to be between 2.25 and 3.25 per cent. 

On Wednesday Fiera Capital Corp. Chief Executive Officer Jean-Guy Desjardins said “the conditions are right” for Canada’s central bank to lower interest rates to approximately three per cent by the end of this year. 

The neutral rate refers to the point at which a central bank’s monetary policy is not restricting or stimulating an economy. 

In April, Sheila Block, an economist and research associate with the Canadian Centre for Policy Alternatives, described the neutral rate as a “Goldilocks” interest rate where the economy can keep growing while inflation remains under control. 

With files from Bloomberg News and the Canadian Press.