Bank of Canada Should Hold Overnight Rate at 1.25% Next Week, Hike to 2% by Next Year

Summary:
Page Title:Bank of Canada Should Hold Overnight Rate at 1.25% Next Week, Hike to 2% by Next Year – C.D. Howe Institute
Article Title:Bank of Canada Should Hold Overnight Rate at 1.25% Next Week, Hike to 2% by Next Year
URL:https://cdhowe.org/publication/bank-canada-should-hold-overnight-rate-125-next-week-hike-2-next-year/
Published Date:May 24, 2018
Accessed Date:February 11, 2025

May 24, 2018 — The C.D. Howe Institute’s Monetary Policy Council (MPC) called for the Bank of Canada to hold its target for the overnight rate, its benchmark policy interest rate, at 1.25 percent at its next announcement on May 30, 2018. Looking further ahead, the Council called for a hike in the target to 1.50 percent in July, with further increases raising it to 2.00 percent by May of 2019.

The MPC provides an independent assessment of the monetary stance consistent with the Bank of Canada’s 2 percent inflation target. William Robson, the Institute’s President and CEO, chairs the Council. Council members make recommendations for the Bank of Canada’s upcoming interest-rate announcement, the subsequent announcement, and the announcements six months and one year ahead. The Council’s formal recommendation for each announcement is the median vote of the members attending the meeting.

All of the seven MPC members who attended this meeting called for an overnight rate target higher than the current one in six months, and six of them called for a hike by July (see table). This consensus in favour of a higher policy interest rate over time reflected the group’s view that the Canadian economy is running at or above its productive capacity, that growth of demand will match or exceed growth of productive capacity over the time horizon that is relevant for monetary policy, and that inflation will run at or slightly above target. Among the positive indicators of activity and inflation around two percent cited by the group were strong export prices, monthly sales indicators, high capacity utilization, and robust growth in wages and profits.

Notwithstanding the consensus for a higher target over time, all but one member recommended that the Bank not hike next week. Some members cited uncertainties on the domestic front, including weaker housing market following policy changes around the beginning of the year, continued concerns about capital investment, and a collapse in the growth rates of key monetary aggregates since last summer, as reasons to keep monetary policy accommodative. Concerns outside Canada, such as protectionism in the United States, weak early-2018 indicators in many major economies, geopolitical risks, and the possibility that flows of capital into the United States will trigger emerging-market problems, also made members cautious about immediate action.

Several Council members noted that although the CPI will likely come in at or above 2 percent through 2019, other indicators of inflation and inflation expectations suggest no sustained move to higher levels. Under those circumstances, they felt it was prudent for the Bank to wait for confirmation of domestic strength, and abatement of some risks abroad, before raising the overnight rate target.

Votes of MPC members and the Council median for each announcement, percent

 May 30        July 11      Dec 2018      May 2019          

Steve Ambler

Université du Québec à Montréal (UQAM)       

1.25

1.50

1.75

2.25

Edward A. Carmichael 

Ted Carmichael Global Macro

1.25

1.25

1.50

1.50

Michael Devereux

University of British Columbia

1.25

1.50

1.50

1.75

Thorsten Koeppl

Queen's University

1.50

1.50

1.75

2.25

Stefan Marion

National Bank Financial

1.25

1.50

1.75

2.00

Angelo Melino 

University of Toronto

1.25

1.50

1.75

2.00

Avery Shenfeld

CIBC

1.25

1.50

1.50

1.75

Median Vote     

1.25

1.50

1.75

2.00

The views and opinions expressed by the participants are their own and do not necessarily reflect the views of the organizations with which they are affiliated, or those of the C.D. Howe Institute.

The MPC’s next vote will take place on July 5, 2018 prior to the Bank of Canada’s interest rate announcement on July 11, 2018. 

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Contact: Kristine Gray — phone: 416-865-1904; e-mail: kgray@cdhowe.org.

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