Bank of Canada Should Hold Overnight Rate at 0.50 Percent through mid-Year; Hike to 0.75 Percent by 2018: C.D. Howe Institute Monetary Policy Council

January 12, 2017 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today called for the Bank of Canada to keep its target for the overnight rate, the very short-term interest rate it targets for monetary policy purposes, at 0.50 percent at its next announcement on January 18, 2017.  Looking ahead, the Council said the Bank should hold the target at 0.50 percent over the next six months, and raise it to 0.75 percent by January of 2018.

The MPC provides an independent assessment of the monetary stance consistent with the Bank of Canada’s 2 percent inflation target. William Robson, the Institute’s President and CEO, chairs the Council.

Council 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 recommendation for each announcement is the median vote of the members attending the meeting.

Nine of the ten MPC members attending this meeting called for an overnight rate target of 0.50 percent at the upcoming announcement and in March, while one called a target of 0.25 percent on both occasions. Six months out, seven members called for a target of 0.50 percent and three for a target of 0.75 percent. One year out, four recommended 0.50 percent, five recommended 0.75 percent, and one recommended 1.00 percent (see table below).

The tendency for MPC members to call for a higher overnight rate target the further ahead they looked reflected some confidence that growth globally and domestically will bring Canadian inflation back to its 2percent target. The group noted improvements in private-sector sentiment in the United States and Canada, and higher oil prices and a better tone to investment intentions. While several MPC members highlighted potential protectionist measures in the United States, and the possibility that a more congenial climate in the United States might divert investment from Canada, as medium-term threats, the dominant sentiment in the Council was that demand was getting more robust.

Among the topics MPC members debated in discussing the potential timing and magnitude of policy rate increases were mixed indicators in the labour market – stronger tallies of jobs versus weaker tallies of hours worked; the continuing strength of residential construction; and the potential for more aggressive interest-rate hikes by the U.S. Federal Reserve than the market expects, knocking the Canadian dollar down.

The pre-eminent topic at this meeting of the Council, however, was inflation expectations. While many members judged that the dominance of below-2-percent inflation readings since 2012 had not damaged confidence that Canada’s inflation rate will average 2-percent, others worried that expectations were moving down from that level. Some members noted that the numbers and commentary in the Bank of Canada’s survey of inflation expectations were not as revealing as they could be. The obscurity of the Bank of Canada’s new “CPI-common” measure of core inflation bothered several members, especially given its recent weak readings. On the whole, the MPC felt the Bank could usefully discuss inflation expectations and risks on that front in its future communications.

Votes of MPC members and the Council median for each announcement, percent.

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 23, 2017 prior to the Bank of Canada’s interest rate announcement on March 1, 2017.

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