April 7, 2011 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada raise its target for the overnight interest rate, the very short-term money-market rate the Bank targets for monetary policy purposes, to 1.25 percent at its next announcement on April 12, 2011. The Council further recommended raising the target rate to 1.50 percent at the following announcement on May 31, 2011, followed by increases that would take it to 2.00 percent in October 2011 and 2.50 percent in April 2012.
The MPC is a panel sponsored by the C.D. Howe Institute to provide an independent assessment of the monetary stance most appropriate for the Bank of Canada as it seeks to achieve its 2 percent inflation target. William Robson, the Institute’s President and CEO, chairs the Council.
The MPC’s formal recommendations for each announcement date are its median votes. The recommendation for April 12 reflected a split between 7 members urging an increase to 1.25 percent and 5 urging no change. The contrast in views about the economic outlook and inflationary pressure in Canada was evident at the longer time horizons: in a year’s time, 6 members recommended an overnight rate target of 2.00-to-2.50 percent, while 5 recommended a target of 3.00 percent, and one recommended 3.50 percent.
One key topic in the group’s discussion was the contrast between recent indicators that demand and output in Canada are stronger than expected and indicators of weakness or slowing growth in the United States, Europe and Asia. On balance, members felt that the disinflationary output gap in Canada was small and closing, and several stressed the possibility that the global economy is increasingly supply-constrained, implying continued strength in commodity prices and general inflationary pressure. Drawing the implications of this situation out for the Bank of Canada, however, revealed key contrasts in view:
- While some members saw an appreciating Canadian dollar as consistent with strength in Canada’s terms of trade, and therefore implying nothing about the desirable path for the overnight rate, others expected a stronger dollar to dampen demand and price pressures in Canada.
- Another key contrast concerned the interpretation of divergent “core” and “headline,” or total inflation measures. Some members felt that ex-food-and-energy measures in the core rate showed that price pressures remained subdued. Others highlighted the total inflation rate, noting that persistent differences in price trends for energy and other commodities versus those for other prices made “core” measures unreliable, and others pointing to survey and market indications that inflationary expectations had moved up.
- Its implications for the medium- and longer-term level of the overnight rate that would be consistent with stable 2-percent inflation were also a matter of debate: some saw global inflationary pressures – with additional concerns about sovereign debt – as factors supporting a higher neutral value for the overnight rate; others argued that slower world growth pointed toward a lower neutral value.
While the group disagreed over the appropriate medium- and longer-term neutral value for the overnight rate, with numbers mentioned ranging from 2.50 percent to 4.00 percent, members unanimously thought the overnight rate should rise from its current level, consistent with the Canadian economy’s emergence from the emergency conditions of 2008-2009. Among the members not wanting to see a rise in April, some mentioned concern about not surprising the market, especially during an election, and urged the Bank of Canada to make the likelihood of increases in the overnight rate in the months ahead a centerpiece of its communications next week. Other members were inclined to think that the total increase in the rate needed over the next year made an immediate move necessary, with some commenting that the best way to ready the market for rate increases was to engineer one.
The table shows the median votes and individual recommendations for the overnight rate at the April 12, 2011 setting and the May 31, 2011 setting, as well as the group’s views about the target in 6 and 12 months’ time.
| MPC Members |
Apr. 12
|
May 31
|
6 months
|
12 months
|
|
Steve Ambler Université du Québec à Montréal (UQAM) |
1.25% | 1.50% | 2.00% | 3.00% |
|
Edward A. Carmichael Ontario Municipal Employees’ Retirement System (OMERS) |
1.00% | 1.25% | 1.75% | 2.25% |
|
Sheryl King BofA Merrill Lynch Global Research |
1.25% | 1.50% | 2.25% | 3.00% |
|
Thorsten Koeppl Queens University |
1.25% | 1.75% | 2.50% | 3.50% |
|
Angelo Melino University of Toronto |
1.00% | 1.25% | 2.00% | 3.00% |
|
Doug Porter BMO Capital Markets |
1.00% | 1.00% | 1.75% | 2.50% |
|
Christopher Ragan McGill University and David Dodge Chair in Monetary Policy, C.D. Howe Institute |
1.25% | 1.50% | 2.00% | 3.00% |
|
Nicholas Rowe Carleton University |
1.25% | 1.50% | 1.75% | 2.00% |
|
Avery Shenfeld CIBC World Markets Inc. |
1.00% | 1.25% | 1.75% | 2.00% |
|
Pierre Siklos Wilfrid Laurier University |
1.25% | 1.50% | 2.00% | 3.00% |
|
Andrew Spence TD Securities |
1.25% | 1.50% | 1.75% | 2.25% |
|
Craig Wright RBC Financial Group |
1.00% | 1.25% | 2.00% | 2.50% |
| Median Vote | 1.25% | 1.50% | 2.00% | 2.50% |
The views and opinions expressed by the Council’s members 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 May 26, 2011, prior to the Bank of Canada’s interest rate announcement on May 31, 2011.
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Contact: Kristine Gray — phone: 416-865-1904; e-mail: kgray@cdhowe.org.