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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 3.25 Percent


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Toronto, April 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 3.25 percent at its next announcement on April 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.

Differences in views about the appropriate setting for the target rate among the group were unusually pronounced on this occasion. Seven of the 10 members attending the meeting recommended a short-term cut in the target rate, with five urging a target of 3.25 percent and two urging a target of 3.00, while two wanted to see the Bank hold steady, and one urged an increase to 3.75 percent. The group’s median call for the overnight rate target at the upcoming setting, the setting in June, and the setting in 6-12 months’ time was 3.25 in each case. The divergence in views was more pronounced, however, as the members looked further ahead. Calls for the overnight rate in 6-12 months’ time ranged from a low of 2.25 to a high of 4.00 percent.

Members favouring greater monetary ease tended to emphasize lower inflation numbers in Canada, the expected impact of US weakness on Canadian growth, and the threat that continuing stresses in credit markets and the financial sector pose to activity in the real economy. Members favouring less ease tended to stress supply constraints, indicators of robust  domestic demand in Canada, and the possibility that an end to, and potential reversal of, the Canadian dollar’s appreciation might boost domestic growth and price pressures.

Along with different interpretations of recent growth trends in both the United States and Canada, a prominent theme in the debate was the appropriate response by the central bank to illiquidity and the recent widening of spreads in short-term credit and money markets. Some members felt that these stresses required a more aggressive easing through lower overnight interest rates; others were more inclined to see supplemental measures by the Bank of Canada to ease temporary illiquidity in these markets as more effective and/or more appropriate ways for the Bank to meet its obligation to ensure financial stability while keeping inflation on 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 April 22, 2008 setting and the June 10, 2008 setting, as well as the group’s views about the target in six to 12 months’ time.

MPC Members
April 22     
June 10     
6 to 12 months     

Jean Boivin

HEC Montréal

3.50% 3.50% 3.50%

Edward A. Carmichael

JP Morgan Chase Canada

3.00% 2.75% 2.50%

Thor Koeppl

Queen's University

3.25% 3.25% 3.50%

David Laidler 

University of Western Ontario     

3.25% 3.25% 3.25%

Michael Parkin 

University of Western Ontario

3.50% 3.50% 4.00%

Christopher Ragan 

McGill University

3.25% 3.25% 3.25%

Angela Redish

University of British Columbia

3.25% 3.25% 3.25%

Nicholas Rowe

Carleton University

3.75% 3.75% 4.00%

David Wolf

Merrill Lynch Canada Inc. 

3.25% 3.00% 2.25%

Craig Wright

RBC Financial Group

3.00% 2.75% 2.75%
Median Vote 3.25% 3.25% 3.25%


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 June 5, 2008, prior to the Bank of Canada’s interest rate announcement on June 10, 2008.

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


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