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


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Toronto, April 16 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada lower the overnight interest rate at its next announcement on April 21, 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, which on this occasion was for a target overnight rate of 0.25 percent. Six of the 10 members attending the meeting recommended cutting the rate to 0.25 percent, while four favoured a rate of 0.50 percent.

With the recommended overnight rate so low, the group felt some modification of the Bank of Canada’s normal approach of setting an “operating band” 0.25 percentage points either side of the target was in order. Some members favouring a 0.50 percent rate said that they felt that the Bank of Canada should hold the rate at or below that level. Critically, members favouring a 0.25 percent rate felt that the Bank of Canada should not let the bottom of the band – the rate at which it pays interest on settlement balances – go to zero, and therefore argued that the band around the target should shrink, perhaps to 0.125 percentage points.

Although the group took some encouragement from recent indicators that output in the North American economies hit bottom in late 2008 and early 2009, the sentiment in favour of continued energetic monetary stimulus was strong. Some members cited the deteriorating situation overseas. Others focused on the likely size and duration of output gaps in Canada and abroad, and the likelihood that inflation and inflation expectations will continue to decline. Notwithstanding the narrowing of spreads on debt securities of short duration and relatively high quality, many felt that much more support from central banks and evidence of economic improvement were needed to support normal credit market activity.

On the degree to which the Bank of Canada should deploy other tools – quantitative and credit easing – to reinforce its support for the economy, a strong majority favoured purchases of Government of Canada securities across the maturity spectrum rather than purchases of private securities. The one member who favoured additional purchases of private debt nevertheless shared the concern that the Bank should avoid being drawn into a role as an allocator of credit.

Several members pointed out that Bank of Canada purchases of government securities need to produce, not additional government deposits at the Bank, but additional cash in the hands of private financial institutions to promote further growth in the monetary base. Although the group was not unanimous on the intermediate targets the Bank should set in this regard, many saw an expansion of the money stock sizeable and rapid enough to support expectations of 2 percent inflation as vital, and argued that the Bank should link its quantitative easing to such a goal.

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 21, 2009 setting and the June 4, 2009 setting, as well as the group’s views about the target in 6-to-12 months’ time.

MPC Members
April 24     
June 4     
6 to 12 months     

Edward A. Carmichael 

Ontario Municipal Employees’ Retirement System (OMERS)     

.25% .25% .25%

Thorsten Koeppl 

Queens University

.50% .50% .50%

David Laidler 

University of Western Ontario

.25% .25% .25%

Michael Parkin

University of Western Ontario

.50% .25% .25%

Doug Porter

BMO Capital Markets

.25% .25% .25%

Angela Redish

University of British Columbia

.25% .25% .25%

Nicholas Rowe

Carleton University

.25% .25% .50%

Pierre Siklos

Wilfrid Laurier University

.50% .50% .50%

Andrew Spence

Ontario Teachers' Pension Plan 

.25% .25% .25%

Craig Wright

RBC Financial Group

.50% .50% .50%
Median Vote .25% .25% .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 2, 2009, prior to the Bank of Canada’s interest rate announcement on June 4, 2009.

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


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