Bank of Canada Should Hold Overnight Rate at 0.75 Percent Next Week; Hike to 1.25 Percent by September 2018: C.D. Howe Institute Monetary Policy Council

August 31, 2017 — The C.D. Howe Institute’s Monetary Policy Council (MPC) 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 0.75 percent at its next announcement on September 6, 2017. The MPC called for the Bank to hike to 1.00 percent at the following announcement in October, with a further increase to 1.25 percent by September 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.

Eight of the 11 MPC members attending this meeting called for a target of 0.75 percent at the September announcement, while three called for 1.00 percent. Looking ahead to the announcement on October 25^th, the balance had shifted to nine favouring 1.00 percent, while two favoured 0.75 percent. For the setting six months out, five favoured 1.25 percent, five favoured 1.00 percent and one called for 0.75 percent. One year out, the recommendations in the group had widened to a range between 1.00 percent and 1.75 percent (see table below).

A dominant theme in the MPC’s discussions for some time, and again at this meeting, was the contrast between robust indicators of economic activity and subdued indicators of inflation. MPC members were unanimous in calling for a higher overnight-rate target in a year’s time, reflecting the positive tone of real spending and output, notably in the gross domestic product and national income accounts figures released today. Yet the group envisioned a modest increase in the target by September 2018 and a measured pace in achieving it, reflecting concern about inflation continuing to run below target.

The group’s assessment of economic activity in the near term was positive: members noted the contribution of households – notwithstanding a cooling in the housing market – business investment and exports to spending, and the breadth and improving geographic balance of growth. Some members expected election-related spending in several provinces to boost demand further over the horizon relevant to monetary policy. The group also noted negative risks related to politics abroad, including tension over North Korea’s nuclear weapons, the possibility of a “government shut-down” in the United States, and NAFTA renegotiation.

In looking at prices and inflation, major points of discussion were the causes and potential impacts of recent movements in the Canadian dollar, a potential reversal of the second quarter’s adverse movement in Canada’s terms-of-trade, and the likelihood that more robust productivity would mute the impact of accelerating wages on unit labour costs. The cooling of the housing market also featured in the discussion, with some members noting that recent and upcoming regulatory changes had reduced the pressure on monetary policy to tighten.

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 August 31, 2017 prior to the Bank of Canada’s interest rate announcement on September 6, 2017.

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