C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Hold Overnight Rate at 1.00 Percent

October 17, 2013 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada keep its target for the overnight rate, the very short-term interest rate the Bank targets for monetary policy purposes, at 1.00 percent at its next announcement on October 23, 2013. The Council further called for the Bank to hold the target at 1.00 through to early 2014, before raising it to 1.25 percent by October 2014.

The MPC is a panel sponsored by the C.D. Howe Institute to provide an independent assessment of the monetary stance appropriate for the Bank of Canada as it aims for its 2 percent inflation target. William Robson, the Institute’s President and Chief Executive Officer, chaired the Council’s 81^st meeting.

The MPC’s formal recommendations for each interest-rate announcement ­­are the median votes of members attending the meeting. Each MPC member makes recommendations for the Bank of Canada’s upcoming interest-rate announcement, the subsequent announcement, and the announcements six months and one year ahead. On this occasion, 9 of the 10 members attending called for a 1.00 percent target next week and at the following announcement in November, while one called for a 0.75 percent target on both occasions. For the April 2014 setting, nine members called for 1.00 percent, and one called for 1.25 percent. Looking a year ahead, there were four calls for an overnight-rate target of 1.00 percent, five for 1.25 percent and one for 1.50 percent.

The strong majority calling for no change in the overnight rate target until early 2014 reflected a balance between two major concerns.

Looking at the balance between aggregate demand and aggregate supply in the Canadian economy, the group noted that the long-anticipated rotation from spending by households and governments to demand led by net exports and business investment continues to disappoint. Concerns about US fiscal policy, a trend of deceleration of growth in China, and renewed trouble in the Eurozone made the group pessimistic about any major boost to growth from abroad. As a consequence, the disinflationary gap between aggregate demand and supply in Canada looks certain to persist until the end of 2014, and likely well beyond that – meaning that CPI inflation will continue to come in below target.

The key argument against the policy-rate reduction which this subdued outlook would otherwise indicate was the continued buoyancy of Canada’s housing market, and concerns about the amount and quality of associated borrowing. These concerns were not acute: several members commented on the moderating pace of mortgage borrowing, indicators of good credit quality, and the possibility that some recent housing-market strength may have been a temporary response by households anticipating higher mortgage rates. Others noted, however, that indicators of the quality of mortgage debt and the balance sheets of financial institutions had looked reassuring before housing-market collapses such as the 2007-08 crisis, and the group generally felt that a policy-rate cut risked adding to housing-related imbalances in the Canadian economy.

The following table shows the votes of each MPC member, as well as the Council’s median vote, for the relevant Bank of Canada policy-rate announcements.

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 November 28, 2013, prior to the Bank of Canada’s interest rate announcement on December 4 2013.

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