C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Raise Overnight Rate to 1.25 Percent on March 1, 2011

Toronto, February 24 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada raise its target for the overnight interest rate, the very short-term money-market rate the Bank targets for monetary policy purposes, to 1.25 percent at its next announcement on March 1, 2011. The Council further recommended raising the target rate to 1.50 percent at the following announcement on April 12, 2011, followed by increases that would take it to 2.00 percent in September 2011 and 2.75 percent in March 2012.

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. Finn Poschmann, the Institute’s Vice President, Research, chaired the sixty-first meeting of the Council.

The MPC’s formal recommendations for each announcement date are its median votes. The recommendation for March 1 reflected a split vote, with three of the nine members attending the meeting urging an unchanged target, and five recommending an increase to 1.25 percent and one recommending an increase to 1.50. The range of recommendations among MPC members tended to increase as the time horizon extended. In their calls for the April 12 setting, two members recommended a target of 1.00 percent, one recommended 1.25 percent, five urged 1.50 percent and one urged 1.75 percent. Recommendations for the target in March 2012 ranged from 2.00 percent to 4.00 percent.

Recent geopolitical events and the implications for growth of rising commodity prices coloured members’ views of what had, until recently, been a strengthening outlook for world and domestic growth. While rising energy and commodity prices are generally positive on balance for Canada, a sharply rising oil price’s negative impact on growth in the US and abroad militated for a more cautious view than otherwise. Other reasons for caution arose from the prospect of fiscal tightening on the part of governments domestically and abroad, and its expected downward impact on demand. Some members referred also to a possible weakening in the US housing market and its negative growth implications.

Members who felt that monetary stimulus should be withdrawn more quickly saw employment conditions and the growth outlook in a more positive light, and expressed concern also that monetary stimulus at current levels may lead to rising inflation expectations. Others felt that very low domestic wage growth and the unemployment rate currently remaining above 7 percent implied that such concerns were at present unwarranted, in which case immediate tightening would be unnecessary.

The median votes for the overnight rate’s trajectory, with steady rises over the course of the coming year, reflected the general view that the domestic economy’s actual output would match its potential in the second half of 2012, by which time most monetary stimulus should have been removed.

The table shows the median votes and individual recommendations for the overnight rate at the March 1, 2011 setting and the April 12, 2011 setting, as well as the group’s views about the target in 6 and 12 months’ time.

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 7, 2011, prior to the Bank of Canada’s interest rate announcement on April 12, 2011.

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