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C.D. Howe Institute’s Monetary Policy Council Calls for Bank of Canada to Lower its Benchmark Interest Rate Target to 0.50 Percent


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Toronto, February 26 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada lower its target for the overnight interest rate by 50 basis points to 0.50 percent at its next announcement on March 3, 2009. 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.

The MPC’s formal recommendation is its median vote. Five of the 10 members attending the meeting recommended cutting the rate to 0.50 percent, while three favoured cutting the rate to 0.25 percent, and two recommended maintaining it at 1.00 percent.

The dominant sentiment around the table was dismay about declines in real activity, and about a related collapse in expectations concerning the future path of prices. The uniformly negative indicators of real activity in Canada and abroad appeared to the group to signal the opening of a strongly disinflationary or deflationary output gap, and members generally felt that near-term, and perhaps longer-term as well, inflation expectations in Canada had fallen well below the Bank of Canada’s 2 percent target.

The group was uncertain about how weak the rest of the world will be, and particularly about whether recent and prospective measures to assist recovery in the United States will work, as well as about the degree to which past monetary stimulus will assist the economy in the near term. The principal reason for divergence among the members in their calls for the overnight rate target, however, was differing assessments of how, how much, and when the Bank of Canada should bring other tools of monetary policy into play.

The group favouring a quick move to a much lower overnight rate target tended to see quantitative easing as a complementary tool to reinforce the impact of the move. Among those favouring a slower or less aggressive cut, one sentiment was that the Bank of Canada needed to brief market participants better on how it would behave once the overnight rate was close to zero before moving there. Those favouring no decrease in the overnight-rate target tended to emphasize quantitative easing’s ability to improve credit-market conditions even without changes in the overnight rate, and thought a lower overnight-rate target should await further signs of collapses in output and inflation expectations.

Several members of the group felt that the Bank of Canada should be more energetic in ensuring that its unconventional measures have their desired effect on the monetary base and on credit conditions, even if the balance-sheet actions required are inconsistent with its overnight-rate target. A further related suggestion was that the Bank should set a range for the target – such as 0.00-to-0.25 percent or 0.00-to-0.50 percent – to make the overnight rate less of a constraint on central-bank action.

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 March 3, 2009 setting and the April 21, 2009 setting, as well as the group’s views about the target in 6-to-12 months’ time.

MPC Members
March 3     
April 21     
6 to 12 months     

Edward A. Carmichael 

Ontario Municipal Employees’ Retirement System (OMERS)     

.25% .25% .25%

Thorsten Koeppl 

Queens University

1.00% 1.00% 1.00%

David Laidler 

University of Western Ontario

.50% .50% .50%

Doug Porter

BMO Capital Markets

.50% .50% .50%

Angela Redish

University of British Columbia

.50% .50% .50%

Nicholas Rowe

Carleton University

.25% .25% .25%

Pierre Siklos

Wilfrid Laurier University

1.00% 1.00% 1.00%

Andrew Spence

Ontario Teachers' Pension Plan 

.25% .25% .25%

David Wolf

Merrill Lynch Canada Inc. 

.50% .25% .25%

Craig Wright

RBC Financial Group

.50% .50% 1.00%
Median Vote .50% .50% .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 April 16, 2009, prior to the Bank of Canada’s interest rate announcement on April 21, 2009.

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


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