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

January 17, 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 January 23, 2013. The Council further called for the Bank to hold the target at 1.00 through mid-year, recommending a target of 1.25 percent by January of 2014.

The MPC is a C.D. Howe Institute project that provides an independent assessment of the Bank of Canada’s monetary stance as it pursues its 2 percent inflation target. William Robson, the Institute’s President and CEO, chairs 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, the ten members attending unanimously called for a 1.00 percent target next week and again in March. Nine of the ten also recommended a 1.00 percent target in July 2013, with one recommending 1.25 percent. By January 2014, four members still called for a 1.00 percent target, while three called for 1.25 percent and three for 1.50 percent.

The consensus for no near-term change in the overnight rate reflected the balance between several sets of considerations in MPC members’ minds. Looking overseas, they tended to take encouragement from recent Chinese indicators suggesting steady growth, while noting that – notwithstanding recent optimism in financial markets – Europe’s fiscal and growth situation remains dire, with heightened risks of political setbacks. They noted recent signs of a strengthening rebound in the United States, but several members underlined the likelihood that fiscal tightening will temper the expansion.

Canadian domestic indicators also present a strong contrast: job market strength on one side, and lacklustre growth in aggregate demand and incomes on the other. Some MPC members remarked that, perhaps because experience of inflation targeting has strengthened expectations of 2 percent inflation in Canada, the influence on inflation of the gap between aggregate demand and the economy’s productive capacity seems to have become weaker.

A final set of considerations for the group was the need for higher interest rates to achieve better macroeconomic balance – particularly continued slowing of household debt growth – on the one hand, balanced by weak growth, below-target inflation, and the problems of raising rates ahead of the US Federal Reserve for the Canadian dollar’s exchange rate on the other. The net result was a remarkable degree of unanimity around an unchanged overnight through the summer, and recommendations for small, if any, increases in the second half of the year.

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 February 28, 2013, prior to the Bank of Canada’s interest rate announcement on March 6, 2013.

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