Bank of Canada Should Hold Overnight Rate at 1.75 Percent for Next 12 Months, Says C.D. Howe Institute Monetary Policy Council

May 23, 2019 – The C.D. Howe Institute’s Monetary Policy Council (MPC) has recommended that the Bank of Canada keep its target for the overnight rate, its benchmark policy interest rate, at 1.75 percent at its next announcement on May 29, 2019, and keep it there through to May of 2020.

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

All ten MPC members attending the meeting called for an unchanged overnight rate at the Bank’s upcoming announcement and its next one in July. Eight of the ten members called for no change in December, while one called for an increase to 2.00 percent by then, and one called for a decrease to 1.50 percent. Looking ahead to May 2020, five members recommended 1.75 percent, four recommended 2.00 percent, and one recommended 1.50 percent (see table).

In assessing the outlook for economic activity, MPC members tended to see Canada’s internal environment as relatively good, and the external environment as relatively bad. Domestically, most recent indicators of spending and output have been on the robust side. Members cited healthy private-sector job growth in particular, and also noted good business earnings and reduced stresses in the housing market as interest rates on mortgages have declined. Externally, members noted slowing growth of world output and particularly world trade. Notwithstanding the short-term boost from the removal of US tariffs on Canadian steel and aluminum, MPC members stressed that US-China trade barriers were already hurting business confidence and investment everywhere, and judged potential further escalation to be a major threat to global growth. One consequence of this good internal and bad external assessment is that the long-hoped-for rotation of Canadian activity away from household spending, and toward business investment and exports, is still not occurring.

Turning to the outlook for inflation, MPC members expressed little concern about either undershoots or overshoots of the Bank of Canada’s 2 percent inflation target. Real GDP growth was very weak in the fourth quarter of 2018 and was likely also weak in the first quarter of 2019, but any resulting disinflationary output gap has had little effect on headline or other measures of CPI inflation. In thinking about the longer-term path for the Bank of Canada’s policy interest rate, some members cited evidence that its “neutral” level – the level that would be consistent with growth in line with productive capacity and inflation steady at 2 percent – was lower than it had historically been, and others noted that other central banks were maintaining an accommodative stance. On balance, these considerations led the group to favour no change in the overnight rate over the coming year.

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 July 4, 2019 prior to the Bank of Canada’s interest rate announcement on July 10, 2019.

To learn more about the MPC Council and view past recommendations click here.

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