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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 1.00 Percent in 2010


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Toronto, December 3 — The C.D. Howe Institute’s Monetary Policy Council today recommended that the Bank of Canada hold its target for the overnight interest rate at 0.25 percent at its next announcement on December 8, 2009. The Council further recommended that the Bank keep the target at 0.25 percent at the Bank’s subsequent announcement in January, in keeping with the Bank of Canada’s conditional commitment to do so into 2010, and raise it thereafter, with the group’s median call being for a target of 1.00 percent in the second half of 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. All 12 members recommended a target of 0.25 percent at the next setting. While two members urged an increase to 0.50 percent for the following setting in January, the other 10 recommended no change. Looking six to twelve months ahead, one member called for the target to stay at 0.25 percent, two called for a target of 0.75 percent, five called for 1.00 percent, two for 1.25 percent, one for 1.50 percent and one for 2.00 percent.

Most members shared a view that output and spending were recovering, and that inflation is on a path back toward the 2 percent target. Among downside risks to the outlook, members focused on renewed US weakness, and the winding down of temporary fiscal stimulus. On the other side of the ledger, several members thought the Canadian housing sector would need damping as activity in the rest of the economy returned to capacity.

The Bank of Canada’s conditional commitment to keep the overnight rate unchanged until mid-2010 was a major focus of discussion: while some members thought the Bank should follow that course even at the cost of a larger-than-otherwise increase in the overnight rate after June, others thought that the Bank needed to re-emphasize the conditional nature of the commitment, and the possibility that changed circumstances would warrant an earlier rise. Following a discussion of the practicality of clearer communication on this subject, three members thought the Bank should publish a conditional forecast of the overnight rate as a matter of course, and two favoured doing so with a lag. The seven opposing such forecasts tended to see misunderstanding of their conditionality as a major risk, with several citing misunderstanding of the current conditional commitment to an unchanged overnight rate as a problem.

A possible unintended effect of the current conditional commitment, in some member’s eyes, was the buoyancy of mortgage lending – particularly variable-rate mortgages – and the housing market. Those members tended to favour a strong signal from the Bank that, once the overnight rate does move up, the move may be quick and large. Others focused on weakness elsewhere in the economy, and felt that other measures, such as raising the required downpayment on government-insured mortgages, were better for reining in the housing market.

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 8, 2009 setting and the January 19, 2010 setting, as well as the group’s views about the target in 6-to-12 months’ time.

MPC Members
Dec. 8     
Jan. 19     
6 to 12 months     

Edward A. Carmichael

Ontario Municipal Employees’ Retirement System (OMERS)      

.25% .25% 2.00%

Thorsten Koeppl 

Queens University

.25% .25% 1.50%

David Laidler

University of Western Ontario

.25% .50% 1.00%

Angelo Melino

University of Toronto

.25% .25% .75%

Michael Parkin

University of Western Ontario

.25% .25% 1.25%

Doug Porter

BMO Capital Markets

.25% .25% 1.00%

Angela Redish

University of British Columbia

.25% .25% 1.00%

Nicholas Rowe

Carleton University

.25% .25% 1.00%

Avery Shenfeld

CIBC World Markets

.25% .25% .25%

Pierre Siklos

Wilfrid Laurier University

.25% .50% 1.00%

Andrew Spence

TD Securities

.25% .25% .75%

Craig Wright

RBC Financial Group

.25% .25% 1.25%
Median Vote .25% .25% 1.00%


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 January 14, 2010, prior to the Bank of Canada’s interest rate announcement on January 19, 2010.

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


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