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C.D. Howe Institute’s Monetary Policy Council Calls for Bank of Canada to Maintain its Benchmark Interest Rate at 0.25 Percent until Next Summer


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Toronto, July 16 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada hold its target for the overnight interest rate at 0.25 percent at its next announcement on July 21, 2009, and keep it there until mid-2010. 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. The group was unanimous in recommending a target of 0.25 percent at the next setting, and six of the seven members attending the meeting recommended a target of 0.25 percent at the following setting in September. When asked to look 6-12 months out, past the horizon over which the Bank has committed to keep the overnight rate at its current level, two members called for an unchanged target of 0.25 percent, two called for a target of 0.50 percent, and three called for 0.75 percent. One of the members who called for a target of 0.50 percent in September did so as part of a recommendation for immediate quantitative easing; none of the other members of the group supported quantitative easing.

Council members generally felt that the financial and economic outlook had continued to improve since the Bank of Canada’s last interest-rate announcement in June. The discussion highlighted the improved tone of financial markets and new issuance of securities, as well as the stabilization of domestic demand in Canada, and especially the unexpected strength in residential real estate. Members also noted survey evidence suggesting that fears of deflation have receded, with inflation expectations more strongly clustered around the Bank’s 2 percent target.

Those signs of improvement notwithstanding, the group noted a number of continuing concerns. One was near-and longer-term weakness in the United States, a second was the failure of equity markets to sustain earlier gains, and a third was evidence that demand for credit is flagging. Some members also noted that a Canadian dollar stronger than trade volumes or prices would justify may slow growth. Another point of discussion was the degree to which common indicators of slack in the Canadian economy accurately reflected the gap between actual and potential output.

Consistent with its discussions in recent meetings, the Council stressed the importance of bringing inflation expectations into line with the Bank’s 2 percent target, and holding them there. A number of members expressed unhappiness with the quality of existing survey and financial-market measures of inflation expectations, and felt that the Bank could support the development of better ones. Another expectations-related point stressed by some members was the need for the Bank to deviate from its commitment to hold the overnight rate at 0.25 percent until June 2010 only when there is extremely compelling evidence of the need for a change.

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 July 21, 2009 setting and the September 10, 2009 setting, as well as the group’s views about the target in 6-to-12 months’ time.

MPC Members
July 21     
Sept. 10     
6 to 12 months     

Thorsten Koeppl 

Queens University    

.25% .25% .75%

Angelo Melino

University of Toronto     

.25% .25% .25%

Doug Porter

BMO Capital Markets  

.25% .25% .50%

Nicholas Rowe

Carleton University

.25% .50% .75%

Avery Shenfeld

CIBC World Markets

.25% .25% .25%

Pierre Siklos

Wilfrid Laurier University     

.25% .25% .50%

Craig Wright

RBC Financial Group

.25% .25% .75%
Median Vote .25% .25% .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 September 8, 2009, prior to the Bank of Canada’s interest rate announcement on September 10, 2009.

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


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