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

November 28, 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 December 4, 2013. The Council further called for the Bank to hold the target at 1.00 through to December 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 82nd meeting.

MPC 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 recommendations for each announcement ­­are the median votes of the members.

The members’ recommendations for the overnight rate produced a strong majority in favour of no change over the coming year. Nine of the 10 members attending the meeting called for a 1.00 percent target next week and eight called for a 1.00 target at the following announcement in January 2014, with one member favouring a rate of 0.75 percent next week and two favouring a rate of 0.75 percent in January. Looking ahead to June 2014 setting, eight members called for 1.00 percent rate with one wanting 0.75 percent and one wanting 1.25 percent; a year ahead, seven called for 1.00 percent, one for 0.75 percent, and two for 1.25 percent.

Notwithstanding the strong majority of votes for a rate of 1.00 percent, the majority of MPC members urged the Bank of Canada to add forward guidance to its communiqué on the upcoming decision indicating willingness to lower interest rates should the disinflationary output gap in the Canadian economy not close as fast as expected, and should inflation look likely to stay below target longer than expected.

This stance – a formal call for no change, but a call for the Bank to state a bias toward easing – reflected three tensions. First was lack of consensus about the economic outlook, with some members emphasizing recent positive indicators of demand both in Canada and abroad. Second was the longstanding concern about rising household debt, which made some members wary of an actual policy rate cut unless accompanied by new federal-government measures to restrain consumer borrowing. The third was some disagreement within the group about how much a lower policy rate would stimulate domestic demand, versus more confidence about the stimulative effects of a lower Canadian dollar – which forward guidance communicating a bias toward easing could accomplish, even without an actual cut.

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 January 16, 2014, prior to the Bank of Canada’s interest rate announcement on January 22 2014.

* * * * *

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