October 19, 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 1.00 percent at its next announcement on October 25, 2017, and keep it there at its December setting. The MPC called for the Bank to hike to 1.25 percent by April of 2018, with a further increase to 1.50 percent by October 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 10 MPC members attending this meeting called for a target of 1.00 percent next week, while one called for a cut to 0.75 percent. Looking ahead to the announcement on December 6th, two of the members who called for 1.00 percent next week urged an increase to 1.25 percent. For the setting six months out, seven favoured a hike to 1.25 percent, with three favouring 1.00 percent. One year out, the group’s recommendations spanned the range between 1.00 percent and 2.00 percent (see table below).
Notwithstanding disappointments on Canada’s trade balance, the group’s assessment of recent indicators of economic activity was generally positive, reflecting steady growth overseas, a generally good (though natural-disaster distorted) performance in the United States, and continued strength in Canadian domestic demand. The group noted that, while different measures of wages tell different stories, the labour market generally seems robust, with unemployment low and labour incomes growing steadily.
With respect to inflation, the group debated whether the Bank of Canada is on track to hit its target. Some members pointed out that unrepresentatively low measures of increases in new house prices and rents might have subdued recent headline CPI measures. Others argued that continued below-target inflation justifies, if not a reduction in the overnight rate, at least a slow pace of increases. The practical and even theoretical significance of the output gap in thinking about how central bank actions affect inflation was another major point of discussion. While most members argued that it is, in principle, key in the transmission mechanism, several felt that evidence of its small impact on changes in inflation and/or major difficulties in calculating it limited its usefulness.
Looking ahead, the group highlighted a number of risks to the outlook. Household debt and the resulting sensitivity of Canada’s economy to interest rate changes loomed large. Several members pointed out that recent changes in regulations affecting mortgage lending might affect both the timing and level of housing activity. The impact of the upcoming major increase in Ontario’s minimum wage on activity and prices was also a concern. The possibility that a breakdown or other adverse outcome in the NAFTA negotiations might hurt exports and business investment also loomed large in the discussion. All these risks tended to reinforce the views of MPC members who argued for a measured pace of increases in the overnight rate.
Votes of MPC members and the Council median for each announcement, percent.
|
Oct 25
|
Dec 6
|
Apr 2018
|
Oct 2018
|
|
|
Université du Québec à Montréal (UQAM) |
1.00 |
1.25 |
1.25 |
1.75 |
|
Ted Carmichael Global Macro |
1.00 |
1.00 |
1.00 |
1.00 |
|
University of British Columbia |
1.00 |
1.00 |
1.25 |
1.50 |
|
Queen's University |
1.00 |
1.00 |
1.25 |
1.75 |
|
National Bank Financial |
1.00 |
1.25 |
1.25 |
2.00 |
|
University of Toronto |
1.00 |
1.00 |
1.00 |
1.00 |
|
BMO Capital Markets |
1.00 |
1.00 |
1.25 |
1.50 |
|
Carleton University |
0.75 |
0.75 |
1.25 |
1.75 |
|
CIBC |
1.00 |
1.00 |
1.00 |
1.25 |
|
Wilfrid Laurier University |
1.00 |
1.00 |
1.25 |
1.50 |
|
Median Vote
|
1.00
|
1.00
|
1.25
|
1.50
|
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 November 30, 2017 prior to the Bank of Canada’s interest rate announcement on December 6, 2017.
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Contact: Kristine Gray — phone: 416-865-1904; e-mail: kgray@cdhowe.org.