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

July 4, 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 July 10, 2019, and maintain it at that level through July 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.

The call for maintaining the overnight-rate target at 1.75 percent this week and for the next announcement in September was unanimous. Looking ahead to January 2020, eleven of the twelve members attending the meeting called for no change, and one called for a cut in the target to 1.50 percent. By July 2020, nine members called for the target to remain at 1.75 percent, two members called for a target of 1.50 percent, and one called for a target of 2.00 percent (see table).

The key theme of the discussion among MPC members was the contrast between a relatively robust performance inside Canada, and a more subdued and concerning outlook abroad – which, on balance, led the group to favour no change in the overnight-rate target.

Members generally assessed the outlook for economic activity in Canada favourably. They cited momentum in domestic demand, with housing activity stabilizing and business investment strengthening, as well as solid growth in employment and wages, and inflation close to – and in the case of headline CPI, above – the Bank of Canada’s target. For the one member who looked for an increase in the policy rate in a year’s time, the strength of the Canadian data was a decisive consideration.

By contrast, MPC members expressed concerns about flagging growth abroad. They cited indicators of weakness in manufacturing globally, and growing speculation about policy rate cuts by the US Federal Reserve and the European Central Bank as evidence of the deteriorating outlook. For the members who looked for cuts in the policy rate over the coming year, the prospect of a global slump was a decisive consideration.

Given this contrast, the implications of a policy rate cut or cuts by the Fed loomed large in the discussion. Some members pointed out that – other things equal – a cut in the Fed Funds rate would prefigure a stronger domestic US economy, with positive implications for Canadian business confidence and exports. Others noted, however, that financial market participants were likely expecting bigger cuts by the Fed than will actually occur, setting the stage for disappointment. Some members felt that, while Canadian data might justify a higher overnight rate target, concerns about an appreciating Canadian/US-dollar exchange rate should keep the Bank of Canada from hiking. On balance, the discussion of US monetary policy reinforced MPC members’ preference for no change in the Bank of Canada’s policy-rate target 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 August 29, 2019 prior to the Bank of Canada’s interest rate announcement on September 4, 2019.

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