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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 1.75 Percent


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Toronto, December 4 — 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 1.75 percent at its next announcement on December 9, 2008. 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. Six of the 11 members attending the meeting recommended cutting the rate to 1.75 percent, and four recommended a cut to 1.50 percent and one recommended a sharper reduction, to 1.00 percent. Looking ahead to the Bank’s interest-rate announcement in January, the Council recommended further lowering to 1.25 percent, and the median call for the rate in 6-12 months’ time was again 1.25 percent.

After observing that financial markets and the real sector in Canada have been performing generally better than elsewhere, Council members cited declining external market conditions as the primary motivation for aggressive easing. Among factors discussed were sharply falling commodity prices, poor current performance and declining expectations in world markets, and an investment boom in China that has now ceased. Members also drew attention to the fact that recent deleveraging in the financial sector appeared to be emerging in the non-bank sector, as borrowing levels decline and households take steps to replenish savings.

While Council members were unanimous on the need for aggressive monetary easing, there was some disagreement among members on the appropriate depth and pace of easing. There was some consensus that systemic weakness has caused market rates and borrowing and lending levels to be less responsive to monetary policy changes than in the past, and that this militated for more aggressive moves than otherwise. Council members were generally unconcerned about overshooting when lowering the policy rate, citing the absence of evidence of domestic inflationary pressure.

In looking ahead to future rate settings, Council members emphasized that their recommendations were conditional on significant fiscal easing being implemented in Canada. Members were also generally of the view that the full range of monetary and fiscal policy tools should be directed to improving consumer confidence.

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 December 9, 2008 setting and the January 20, 2009 setting, as well as the group’s views about the target in 6-to-12 months’ time.

MPC Members
December 9     
January 20     
6 to 12 months     

Jean Boivin

HEC Montréal

1.50% 1.50% 1.50%

Ted Carmichael


1.50% 1.00% 1.00%

Thorsten Koeppl 

Queens University

1.75% 1.50% 1.50%

David Laidler 

University of Western Ontario     

1.50% 1.00% 1.00%

Doug Porter

BMO Capital Markets

1.75% 1.50% 1.50%

Christopher Ragan

McGill University

1.75% 1.50% 1.25%

Angela Redish

University of British Columbia

1.50% 1.25% 1.00%

Nicholas Rowe

Carleton University

1.00% 1.00% 1.25%

Pierre Siklos

Wilfrid Laurier University

1.75% 1.25% 1.00%

David Wolf

Merrill Lynch Canada Inc. 

1.75% 1.25% 1.00%

Craig Wright

RBC Financial Group

1.75% 1.75% 1.75%
Median Vote 1.75% 1.25% 1.25%


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 January 15, 2009, prior to the Bank of Canada’s interest rate announcement on January 20, 2009.

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


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