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C.D. Howe Institute’s Monetary Policy Council Calls for Bank of Canada to Cut its Benchmark Interest Rate Target to 4.00 Percent

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Toronto, January 17 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada lower its target for the key overnight interest rate to 4.00 percent at its next announcement on January 22. The overnight rate is a very short-term money-market rate that the central bank targets for monetary policy purposes.

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.

While views in the group were not uniform, all but 2 of the 10 members attending the meeting urged the Bank of Canada to lower its overnight rate target at the upcoming setting, with 6 calling for a target of 4.00 percent, and 2 calling for a target of 3.75 percent. Concerns about weakness in growth, particularly in the United States, and desire for the Bank to accommodate wider spreads between the overnight rate and other short-term interest rates produced a slight bias toward a still lower target as the group looked further ahead. When asked for their views on the appropriate overnight rate 6-12 months out, 3 members called for a target of 4.25 percent, 3 called for 4.00 percent, 2 called for 3.75 percent, and 2 called for 3.25 percent.

Members who urged an unchanged or only modestly reduced target at the upcoming setting tended to stress continued pressures on Canada’s productive capacity from strong domestic demand, and the importance of the past appreciation of the Canadian dollar and the GST cut in holding total CPI inflation in check — influences that will fade over time.

Members who urged a lower target at the upcoming setting and further reductions thereafter tended to expect a deeper and more prolonged downturn in the US economy. A view that recent problems in commercial paper markets mean that spreads between central bank policy rates and other short-term interest rates will be wider for the foreseeable future also inspired many members to urge the Bank to aim for a lower overnight-rate target.

The recommendation of the MPC is the median of the votes cast by individual members attending the session. The table shows the median votes and individual recommendations for the overnight rate at the January 22, 2008 setting and the March 4, 2008 setting, as well as the group’s views about the target in six to 12 months’ time. In cases where the median falls in the middle of a 25-basis-point range, the formal recommendation of the Council is the number closer to the previous target. In this session, the group’s calls with respect to the March 4 target fell in the middle of the range: the unrounded median call was 3.875 percent — indicative of the group’s general tendency to favour a declining interest-rate target for the Bank. 

MPC Members
January 22     
March 4     
6 to 12 months     

Jean Boivin

HEC Montréal

4.00% 4.00% 4.25%

Edward A. Carmichael

JP Morgan Chase Canada

3.75% 3.50% 3.25%

Thor Koeppl

Queen's University

4.25% 4.00% 4.25%

David Laidler 

University of Western Ontario

3.75% 3.75% 4.00%

Michael Parkin

University of Western Ontario

4.25% 4.25% 4.25%

Nicholas Rowe

Carleton University

4.00% 4.00%

4.00%

Pierre Siklos

Wilfrid Laurier University

4.00% 4.00% 4.00%

Andrew Spence

Ontario Teachers’ Pension Plan     

4.00% 3.75% 3.75%

David Wolf

Merrill Lynch Canada Inc. 

4.00% 3.75% 3.25%

Craig Wright

RBC Financial Group

4.00% 3.75% 3.75%
Median Vote 4.00% 4.00% 4.00%

 

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 February 28, 2008, prior to the Bank of Canada’s interest rate announcement on March 4, 2008.

* * * * *

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

 

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