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C.D. Howe Institute’s Monetary Policy Council Calls for Bank of Canada to Maintain Overnight Rate at 0.25 Percent, With Increase to 0.75 Percent in September 2010


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Toronto, February 25 — The C.D. Howe Institute’s Monetary Policy Council today recommended that the Bank of Canada hold its target for the overnight interest rate (the very short-term money-market rate that the Bank targets for monetary policy purposes) at 0.25 percent at its next announcement on March 2, 2010. The Council further recommended keeping the target at 0.25 percent at the Bank’s next announcement in April, consistent with its conditional commitment to do so until mid-year. The MPC’s recommendation for September, the second announcement date after the Bank’s conditional commitment expires, was for a target of 0.75 percent. Looking one year ahead, the Council’s recommendation was for a target of 2.00 percent in March 2011.

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. All nine members attending the meeting recommended a target of 0.25 percent next week, and eight recommended the same in April. For the September setting, two members wanted a target of 0.50 percent, one wanted 0.70 percent, two 0.75 percent, three 1.00 percent and one 1.25 percent. Calls for the rate in March 2011 ranged from a low of 1.50 percent to a high of 3.25 percent.

The group’s call reflected a number of strong contrasts, both in current information on economic growth and inflation, and in members’ expectations and assessments of risks.

On the economic front, the discussion highlighted strength in Canadian domestic indicators and growth in emerging markets, particularly in Asia, in contrast to recent disappointing indicators in the United States and relative stagnation in Europe and Japan. Another key theme was short-term and longer-term risks for inflation. In Canada, inflation has been stronger than expected, suggesting that the economy’s productive potential – and therefore the disinflationary output gap – is lower than most calculations show. And fiscal woes abroad, combined with recent high-profile international recommendations for higher inflation targets, concerned many members.

Other fiscal developments received considerable attention in the discussion. Several members highlighted risks to growth in the next couple of years as countries around the world balance their budgets. A more immediate concern was the potential for fiscal woes abroad to trigger flows of funds into assets denominated in US and, particularly, Canadian dollars, resulting in exchange-rate appreciation that might restrain domestic output.

On balance, these considerations inclined the group to recommend a relatively gradual program of overnight-rate increases – 25 or 50 basis point increments at each announcement – after the Bank of Canada’s conditional commitment to keep the rate at its effective minimum until mid-year expires. Members noted, however, that expectations among financial market participants and the public are for an even more gradual increase in the overnight rate than the Council thought appropriate, and agreed that the Bank needs to emphasize the potential for increases that are faster and larger than are generally anticipated. The group urged the Bank to use its April Monetary Policy Report to explain its intentions after the conditional commitment expires, emphasizing the substantial upside and downside risks to the outlook for growth and inflation, and particularly the possibility of a rapid movement of the overnight rate back to a level consistent with inflation control under non-crisis conditions.

The table shows the median votes and individual recommendations for the overnight rate at the March 2, 2010 setting and the April 20, 2010 setting, as well as the group’s views about the target in 6 and 12 months’ time.

MPC Members
Mar. 2     
Apr. 20     
6 months     
12 months     

Edward A. Carmichael

Ontario Municipal Employees’ Retirement System (OMERS)     

.25% .25% 1.00% 2.50%

Thorsten Koeppl 

Queens University

.25% .25% 1.00% 2.25%

David Laidler

University of Western Ontario

.25% .30% .70% 2.00%

Angelo Melino

University of Toronto

.25% .25% 1.00% 2.50%

Michael Parkin

University of Western Ontario

.25% .25% 1.25% 3.25%

Angela Redish

University of British Columbia

.25% .25% .75% 2.00%

Nicholas Rowe

Carleton University

.25% .25% .50% 1.50%

Pierre Siklos

Wilfrid Laurier University

.25% .25% .50% 1.50%

Craig Wright

RBC Financial Group

.25% .25% .75% 2.00%
Median Vote .25% .25% .75% 2.00%


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 15, 2010, prior to the Bank of Canada’s interest rate announcement on April 20, 2010.

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


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