Bank of Canada Should Hold Overnight Rate at 1.25 Percent Next Week, Hike to 2.00 by Next Year: C.D. Howe Institute Monetary Policy Council

April 12, 2018 — The C.D. Howe Institute’s Monetary Policy Council (MPC) called for the Bank of Canada to maintain its target for the overnight rate, the very short-term interest rate it targets for monetary policy purposes, at 1.25 percent at its next announcement on April 18, 2018. Looking further ahead, the Council called for a target of 1.50 percent in May, with further increases taking the target to 2.00 percent by April of 2019.

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.

The tendency to favour higher policy rates over time showed clearly in the distribution of votes among the nine MPC members who attended this meeting. For next week’s announcement, seven called for no change; two for an increase to 1.50 percent. For the May announcement, four called for no change; five for 1.50 percent. For the announcement six months from now, one called for 1.25 percent, four for 1.50 percent and four for 1.75 percent. For the announcement a year from now, the calls ranged from one member at 1.50 percent to three members at 2.25 percent (see table below).

The decisive consideration for most members was the movement of year-over-year increases in the consumer price index above 2 percent, and the prospect that CPI inflation will stay above 2 percent through 2019. While the group’s discussion acknowledged an apparently weak first quarter in the United States, recent middling labour-market indicators, and the abrupt softening of key housing markets, its overall assessment was that the Canadian economy is running at or above its productive capacity, and that demand will keep pace with growth of productive capacity for the foreseeable future.

Council members who urged a more aggressive pace of overnight rate increases tended to emphasize measures of inflation expectations that are now registering above 2 percent, with some noting that other major central banks are moving to tighter stances, creating an opening for the Bank of Canada to get the overnight rate up toward a level more consistent with steady growth and inflation on target over the longer run. Council members urging a less aggressive pace tended to emphasize continuing disappointments on the trade front, and weakness in several key measures of business investment and investment intentions.

The Council devoted some attention to the question of whether the Bank of Canada should foster an economy running “hot”, with the potential for inflation to remain in the top end of the Bank’s 1-to-3 percent target range for a protracted period. While some members took a sanguine view of that possibility, others emphasized the desirability of the Bank delivering 2 percent inflation year-over-year – consistent with its mandate and the need to keep inflation expectations anchored on 2 percent.

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 May 24, 2018 prior to the Bank of Canada’s interest rate announcement on May 30, 2018.

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