Toronto, September 8 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada hold its target for the overnight interest rate at 0.25 percent at its next announcement on September 10, 2009. The Council further recommended that the Bank keep the target at 0.25 percent until mid-2010, and looked for a target of 0.75 percent a year from now. 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.
The MPC’s formal recommendation is its median vote. All eleven members attending the meeting recommended a target of 0.25 percent at the next setting, and at the following setting in October. When asked to look past the July-2010 horizon through which the Bank has committed to keep the overnight rate at its current level, three members called for the target to stay at 0.25 percent, two called for a target of 0.50 percent, and six called for 0.75 percent.
A key backdrop to the Council’s discussion was continuing improvement in most domestic economic and financial indicators. Members gave particular attention to strength in residential real-estate and government spending, and signs of current and incipient strength in credit markets, monetary aggregates and share prices.
Muting the growth outlook were questions about how sustainable and supportive for Canadian exports growth abroad will be, with the dependence of US and Chinese growth on government stimulus being a particular point of concern.
A key point of uncertainty in the conversation was the size and future profile of the output gap in Canada, since the recession has likely affected the level – and possibly the growth path – of aggregate supply. Notwithstanding that uncertainty, most members of the group took comfort from the degree to which inflation expectations are centred on two percent, and felt that the Bank of Canada should work to reinforce them.
While some members expressed discomfort with the Canadian dollar’s recent strength against the US dollar, few felt that the Bank of Canada should react in words or deeds, and several stressed that attempts to steer the exchange rate had led monetary policy badly astray in the past.
The Council also discussed the Bank of Canada’s conditional commitment to keep the overnight rate unchanged until mid-2010. Most members argued that, having made this commitment, the Bank should not deviate from the interest-rate path it laid out unless circumstances clearly justified a change – which, at present, they did not. Should developments make monetary tightening at a pace faster than currently contemplated appear desirable, several members pointed out that the Bank had tools – quantitative methods including both currently active and inactive credit facilities, and an announcement of prospective overnight-rate increases in late 2010 – that could shape monetary conditions without changes in the current overnight rate.
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 September 10, 2009 setting and the October 20, 2009 setting, as well as the group’s views about the target in 6-to-12 months’ time.
| MPC Members |
Sept. 10
|
Oct. 20
|
6 to 12 months
|
|
Thorsten Koeppl Queens University |
.25% | .25% | .50% |
|
David Ladler University of Western Ontario |
.25% | .25% | .75% |
|
Angelo Melino University of Toronto |
.25% | .25% | .50% |
|
Michael Parkin University of Western Ontario |
.25% | .25% | .75% |
|
Doug Porter BMO Capital Markets |
.25% | .25% | .75% |
|
Angela Redish University of British Columbia |
.25% | .25% | .75% |
|
Nicholas Rowe Carleton University |
.25% | .25% | .75% |
|
Avery Shenfeld CIBC World Markets |
.25% | .25% | .25% |
|
Pierre Siklos Wilfrid Laurier University |
.25% | .25% | .25% |
|
Andrew Spence TD Securities |
.25% | .25% | .25% |
|
Craig Wright RBC Financial Group |
.25% | .25% | .75% |
| Median Vote | .25% | .25% | .75% |
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 October 15, 2009, prior to the Bank of Canada’s interest rate announcement on October 20, 2009.
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Contact: Kristine Gray — phone: 416-865-1904; e-mail: kgray@cdhowe.org.