May 21, 2015 — 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 0.75 percent at its next announcement on May 27, 2015. Looking ahead, the Council called for the Bank to hold the target at 0.75 percent through to December, raising it to 1.00 percent by May of 2016.
The MPC provides an independent assessment of the monetary stance appropriate for the Bank of Canada as it pursues its 2 percent inflation target. William Robson, the Institute’s President and Chief Executive Officer, 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.
While Council members’ call for the upcoming announcement was close to unanimous, with nine of the ten members attending calling for 0.75 percent and one calling for a cut to 0.50 percent, the recommendations were much more varied as members looked further out. Two additional members urged a cut to 0.50 percent in July, while one urged an increase to 1.00 percent. By December, one was looking for 0.50 percent, three for 1.00 percent and one for 1.25 percent. A year from now, calls ranged from 0.75 percent (three members) at the low end to 1.50 percent (two members) at the high end.
The median call for no change in the overnight rate until December and a modest increase after that reflected a balance of opinion among Council members that spending and output in Canada are growing at a pace that will eliminate any disinflationary output gap and return inflation to target around the end of the year. Among the indicators cited in support of this view were (i) job growth in central Canada offsetting weakness in oil-producing regions, (ii) the lower level of the Canadian dollar, (iii) the momentum of demand and output – reflected in relatively robust core inflation measures – in the run-up to the oil-price collapse at the turn of the year, and (iv) the partial recovery of oil prices since then.
The group generally felt that the external environment was supportive of activity in Canada. Some members thought investors and policymakers might have become too complacent about a potential financial and economic disruption triggered by a Greek default. The challenge of interpreting recent U.S. data was another topic, with varying views about the degree to which weak indicators of demand and activity early in the year reflected problems of seasonal adjustment. On balance, however, anxiety about negative impacts on the Canadian economy from abroad had diminished since the previous meeting.
A major topic of discussion was whether the Bank of Canada should respond to the level and growth of borrowing by Canadian households and businesses in setting the overnight rate. This focus partly reflected differences in opinion about whether recent credit growth was a concern, and about the significance of debt that the fall in oil prices had made harder to service. But it also reflected differing views about the desirability of using macroprudential tools, such as rules about downpayments on mortgages, to offset any tendency for a low overnight rate to overstimulate borrowing, and about the likelihood that such tools would actually be used in the run-up to a federal election.
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 | May 27 | July 15 | 6 months | 12 months |
| Steve Ambler Université du Québec à Montréal (UQAM) |
0.75% | 0.75% | 1.00% | 1.25% |
| Edward A. Carmichael Ted Carmichael Global Macro |
0.50% | 0.50% | 0.50% | 0.75% |
| Thorsten Koeppl Queens University |
0.75% | 1.00% | 1.25% | 1.50% |
| Stéfane Marion National Bank |
0.75% | 0.75% | 0.75% | 0.75% |
| Angelo Melino University of Toronto |
0.75% | 0.50% | 0.75% | 1.00% |
| Nicholas Rowe Carleton University |
0.75% | 0.75% | 1.00% | 1.25% |
| Avery Shenfeld CIBC World Markets Inc. |
0.75% | 0.50% | 0.75% | 1.00% |
| Pierre Siklos Wilfrid Laurier University |
0.75% | 0.75% | 1.00% | 1.50% |
| David Tulk TD Bank |
0.75% | 0.75% | 0.75% | 0.75% |
| Craig Wright RBC Financial Group |
0.75%% | 0.75%% | 0.75%% | 1.00% |
| Median Vote | 0.75%% | 0.75%% | 0.75%% | 1.00% |
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 9, 2015 prior to the Bank of Canada’s interest rate announcement on July 15 2015.
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Contact: Kristine Gray — phone: 416-865-1904; e-mail: kgray@cdhowe.org.