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C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Hold Overnight Rate at 1.00 Percent


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January 12, 2012 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada maintain its target for the overnight rate, the very short-term interest rate the Bank targets for monetary policy purposes, at 1.00 percent at its next announcement on January 17, 2012. Weak economic indicators in Canada and abroad, and the possibility of a dramatic deterioration in Europe’s fiscal and financial situation, led the MPC to call for the Bank’s overnight rate to stay at 1.00 percent past mid-year, with the median call for the rate in a year’s time being 1.25 percent.

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 makes formal recommendations for the Bank of Canada’s upcoming announcement, the announcement after that, the announcement in six months’ time, and the announcement in one year’s time. The calls for an unchanged target on January 17 and March 8 were almost unanimous, with 10 of the 11 members attending the session calling for a rate of 1.00 percent, and one calling for 0.75 percent. Sentiment diverged markedly over the longer time horizons. By January 2013, six members called for a higher overnight rate, with one advocating a target of 2.25 percent, while five called for 1.00 percent or lower, with one advocating a target of 0.25 percent.

In general, the group felt that inflation expectations in Canada remain well anchored around the Bank’s 2 percent target, and expected that actual inflation will move toward the target in the coming year. This assessment reflected a view that, notwithstanding some recent indicators of strength in US spending and output, economic activity is slowing worldwide, and that the Canadian economy is also softening. On the domestic front, members highlighted recent weakness in Canadian employment, with some observing that downward pressure on costs and wages outside the resource sector will be a continuing challenge, and a couple of members also highlighting the possibility that fiscal austerity will further dampen Canadian demand in the medium term.

Part of the group’s discussion focused on problems interpreting recent economic indicators. The job numbers were a particular concern, given volatile provincial patterns, as was the larger question of whether recent weakness was a reversion to more normal conditions after the Canadian job market had done much better than suggested by other indicators of activity during the 2009 slump and the recovery. The degree to which worries about demand and access to financing will inhibit the translation of healthy earnings and cashflows into domestic investment by Canadian businesses was also a subject of debate.

As in past meetings, however, the pre-eminent concern for the group was the possibility of a European fiscal and financial crisis – an uncontrolled default, a partial breakdown of the Euro area, and/or a banking collapse. Some took heart from recent indicators that support for the banking system by the European Central Bank is easing immediate liquidity pressures and reducing bond yields of some distressed governments. For the most part, however, the group felt that an orderly resolution of Europe’s problems required too many political and economic circumstances to work out well simultaneously, and that the likelihood of bad news on that front should influence the Bank of Canada’s rate setting now and into 2013.

MPC Members Jan. 17 Mar. 8 6 months 12 months

Steve Ambler

Université du Québec à Montréal (UQAM)

1.00%           1.00%           1.00%          1.25%         

Edward A. Carmichael 

Ontario Municipal Employees’ Retirement System (OMERS)

1.00% 1.00% 1.00% 1.00%

Sheryl King

BofA Merrill Lynch Global Research

1.00% 1.00% 0.50% 0.25%

Thorsten Koeppl 

Queens University

1.00% 1.00% 1.25% 2.25%

Angelo Melino

University of Toronto

1.00% 1.00% 1.00% 1.50%

Christopher Ragan

McGill University and David Dodge Chair in Monetary Policy, C.D. Howe Institute          

1.00% 1.00% 1.50% 2.00%

Nicholas Rowe

Carleton University

0.75% 0.75% 1.00% 1.25%

Avery Shenfeld

CIBC World Markets Inc.

1.00% 1.00% 1.00% 1.00%

Pierre Siklos

Wilfrid Laurier University

1.00% 1.00% 0.75% 0.50%

Andrew Spence

TD Securities

1.00% 1.00% 1.00% 1.00%

Craig Wright

RBC Financial Group

1.00% 1.00% 1.00% 1.50%
Median Vote 1.00% 1.00% 1.00% 1.25%


The views and opinions expressed by the participants 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 March 6, 2012, prior to the Bank of Canada’s interest rate announcement on March 8, 2012.

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

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