C.D. Howe Institute’s Monetary Policy Council Calls for Bank of Canada to Cut its Benchmark Interest Rate Target to 3.75 Percent

Toronto, February 28 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada lower its target for the key overnight interest rate to 3.75 percent at its next announcement on March 4. The overnight rate is a very short-term money-market rate that the central bank targets for monetary policy purposes.

The MPC is a panel sponsored by the C.D. Howe Institute to provide an independent assessment of the monetary stance most appropriate for the Bank of Canada as it seeks to achieve its 2 percent inflation target. William Robson, the Institute’s President and CEO, chairs the Council.

Seven of the nine members attending the meeting recommended a short-term cut in the target rate, with five urging a target of 3.75 and two urging a target of 3.50. The general sense in the group was that a slackening of demand pressure, due very largely to a deterioration in the external balance, is reducing inflationary pressure in the Canadian economy. Members’ expectations diverged considerably as they looked further ahead, however, with their prescriptions for the overnight rate target differing according to the degree they thought the Bank of Canada should act to counteract emerging weakness.

Members favouring greater monetary ease tended to emphasize the weak US outlook, continued stress in credit markets and the financial sector, and signs that inflationary pressure in Canada is already easing. Among this group, expectations for near-term growth in real GDP tended to be low or flat. Several members pointed out that longer-term inflation expectations in Canada appear to be well anchored, lessening the risks associated with an aggressive easing by the Bank.

Members who favoured less ease in the short term and looked for relative stability in the overnight rate over the medium term tended to stress continued robust growth in much of the developing world, the strength of domestic demand in Canada, and signs – particularly wage increases well in excess of productivity growth – that the past appreciation of the dollar was exercising a temporary damping effect on indicators of inflation.

The recommendation of the MPC is the median of the votes cast by individual members attending the session. The table shows the median votes and individual recommendations for the overnight rate at the March 4, 2008 setting and the April 22, 2008 setting, as well as the group’s views about the target in six to 12 months’ time. Median votes were, respectively, 3.75, 3.75 and 4.00 percent. In cases where the median falls in the middle of a 25-basis-point range, the formal recommendation of the Council is the number closer to the previous target. The group’s calls for the overnight rate in six to 12 months’ time were highly dispersed and highlight the extent of uncertainty about the outlook for the US economy in the light of the US Federal Reserve’s recent aggressive easing, differing interpretations of recent indicators of the state of the Canadian labour market, and uncertainty about the direction of Canadian inflation once the influence of the currency and the cut in the Goods and Services Tax have dissipated.

The views and opinions expressed by the Council’s members 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 April 17, 2008, prior to the Bank of Canada’s interest rate announcement on April 22, 2008.

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