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

April 11, 2013 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada maintain 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 April 17, 2013. The Council further called for the Bank to hold the target at 1.00 through to April of 2014.

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 seventy-seventh meeting of the Council.

The MPC’s formal recommendations ­­are the median votes of members attending the meeting. Members give their individual 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, seven of the 9 voting members called for a 1.00 percent target next week, while two called for the Bank to lower the target to 0.75 percent. For the following setting in May, one member lowered his call to 0.50 percent. For October 2013, one member raised his target from 0.75 percent to 1.00 percent, with other votes unchanged. By April 2014, one member wanted 0.75 percent, two 1.25 percent, and the six others 1.00 percent.

No members sought an immediate or near-term rise in the overnight rate, and some sought a fall, pointing to a lack of positives with respect to the growth outlook, and a range of negative or uncertain indicators, including poor export growth, particularly for energy commodities. Among the factors mentioned by most members were unexpectedly weak and weakening employment data, and their volatility, in Canada and the United States, profound uncertainty over European growth prospects, and an apparent softening of inflation expectations in Canada as well as the Eurozone. Further, some members were of the view that soft domestic employment numbers and modest growth forecasts implied that the current disinflationary output gap was unlikely soon to close, and may instead widen in late 2013.

Among issues raised by some members was the impact of some foreign central banks’ extremely accommodative monetary stances, in particular the Bank of Japan’s recently announced and large quantitative easing program, as sources of upward pressure on the Canadian dollar. Another was the apparent slowing pace of Canadian consumer debt accumulation. On the view of some, these factors may lend the Bank of Canada some confidence in maintaining its current accommodative stance, as opposed to holding a bias toward tightening that stance.

On communications, most members felt that the Bank of Canada should remove, from its next statement, an expression of its bias toward a potential increase in the overnight rate, and instead adopt a neutral bias in its language.

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 May 23, 2013, prior to the Bank of Canada’s interest rate announcement on May 29, 2013.

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