C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Hold Overnight Rate at 1.00 Percent at Next Setting; Looks for 1.25 by June 2015

May 29, 2014 — 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 1.00 percent at its next announcement on June 4, 2014. Looking ahead, the Council called for the Bank to hold the target at 1.00 percent through the fall of this year, but called for a target of 1.25 by June 2015.

The MPC provides an independent assessment of the monetary stance appropriate for the Bank of Canada as it aims for its 2 percent inflation target. Finn Poschmann, the Institute’s Vice President, Research, chaired the Council’s 86th meeting.

MPC 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 recommendations for each announcement ­­are the median votes of the members.

The call for a 1.00 target for the upcoming announcement and at the subsequent announcement in July was unanimous among the ten MPC members attending the meeting. Looking ahead to the November 2014 setting, six members favoured another setting at 1.00 percent, while three favoured an increase to 1.25 percent and one favoured 1.50 percent. By June 2015, three members still called for a target of 1.00 percent, three called for 1.25 three called for 1.50 percent, and one for 1.75 percent.

The group’s discussion noted foremost that concerns over persistently below-target inflation in Canada were dissipating, and in particular that headline inflation, as well as core measures, appeared to be trending upward, and that trends in the Canada-US exchange rate appeared to be having benign impacts on exports. Further, notwithstanding weak labour force data, other growth measures warranted a cautiously positive outlook. Such measures included positive manufacturing profit trends, and an improving US economy, where leading indicators and lending activity suggested favourable prospects. Few concerns were raised with respect to prospects for the euro-area, with some members pointing to continued strength in the German economy.

Among risks to the outlook, Council members noted that Chinese growth appeared to be lower than previously expected, putting downward pressure on demand for Canada’s exports. Domestic concerns centred on weak labour market performance.

Several Council members expressed deep concern over the pace of housing price growth in some large Canadian markets, and the possibility that continued gains would provide impetus for interest rate increases that were unwarranted elsewhere in the economy. Some members, on the other hand, noted that expectations for persistently low real interest rates would support price levels higher than otherwise. They also noted that while consumer debt growth was slowing, its currently high level implied that even small increases in interest rates would put significant downward pressure on household spending, and that the Bank of Canada would need to consider such factors in decisions on when and by how much to increase the overnight rate.

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.

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 10, 2014, prior to the Bank of Canada’s interest rate announcement on July 16, 2014.

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