March 3, 2016 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada keep its target for the overnight rate, the very short-term interest rate it targets for monetary policy purposes, at 0.50 percent at its next announcement on March 9, 2016, and hold it there for at least a year.
The MPC provides an independent assessment of 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. On this occasion, four of the 10 members attending the meeting favoured the median result: 0.50 percent for each announcement. Among the other six, some favoured a cut to 0.25 percent over the next six months. By March 2017, two favoured 0.25 percent while four favoured an increase to 0.75 percent (see table below). The general tone of MPC members’ discussion of the outlook for economic activity in Canada was somewhat better than when the group met before the Bank of Canada’s policy-rate setting in January. Concerns about decelerations in China and Europe had abated, with gains in US domestic demand adding to a positive environment for Canadian exports. While some comments underlined the depth of the downturn in the energy sector, others cited healthy profits outside the energy sector as hopeful for business investment and employment growth.
Discussion of the outlook for inflation highlighted two major points of uncertainty or disagreement. One was about the measurement and significance of possible disinflationary slack in the Canadian economy in the wake of the oil price collapse. Some members emphasized its negative effects on Canadian demand, and were more inclined to recommend monetary stimulus to counteract its disinflationary impact. Others emphasized its negative effects, at least during a period of adjustment, on Canada’s productive capacity, and argued that monetary policy should not try to offset it.
Another debate centred on inflation expectations, notably as measured by the spread between yields on Government of Canada nominal-return and real-return long-term bonds, which – after being steadily close to 2.0 percent from late 2011 until late 2014 – has recently registered below 1.4 percent. Some members noted similar developments outside Canada, and wondered if investors generally might be losing confidence in central banks’ ability to hit inflation targets. Others felt that special factors, including the liquidity of markets for real-return bonds, could explain these movements, and that survey respondents tended to forecast 2 percent inflation.
The Canadian dollar’s foreign exchange rate also figured in the discussions, with some members arguing that its recent strength created either an opportunity for the Bank of Canada to ease, or a greater imperative for it to do so. Members also discussed the potential impact of fiscal policy on demand, with several noting explicitly that their recommendations could change after the federal budget on March 22nd.
The following table shows the votes of each MPC member, as well as the Council’s median vote, for the relevant Bank of Canada policy-rate announcements.
|
MPC Members
|
Mar 9
|
Apr 13
|
6 months
|
12 months
|
|
Université du Québec à Montréal (UQAM)
|
0.50%
|
0.50%
|
0.50%
|
0.75%
|
|
University of British Columbia
|
0.50%
|
0.50%
|
0.50%
|
0.50%
|
|
Ted Carmichael Global Macro
|
0.25%
|
0.25%
|
0.25%
|
0.25% |
|
Queens University
|
0.50%
|
0.50%
|
0.50%
|
0.75%
|
|
National Bank
|
0.50%
|
0.50%
|
0.50%
|
0.50%
|
|
University of Toronto
|
0.25%
|
0.25%
|
0.50%
|
0.75%
|
|
BMO Capital Markets
|
0.50%
|
0.25%
|
0.25%
|
0.25%
|
|
CIBC World Markets Inc.
|
0.50%
|
0.50%
|
0.50%
|
0.50%
|
|
Wilfried Laurier University
|
0.50%
|
0.50%
|
0.50%
|
0.50%
|
|
RBC Financial Group
|
0.50%
|
0.50%
|
0.50%
|
0.75%
|
|
Median Vote
|
0.50%
|
0.50%
|
0.50%
|
0.50%
|
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 April 7, 2016 prior to the Bank of Canada’s interest rate announcement on April 13, 2016.
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Contact: Kristine Gray — phone: 416-865-1904; e-mail: kgray@cdhowe.org.