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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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March 6, 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 March 8, 2012. Tension between concerns about inflation running above target domestically and fear of adverse events abroad led the group, on balance, to recommend that the overnight rate should stay at 1.00 percent over the coming year.

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 ­­– its median vote – 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 March 8 and April 17 were unanimous. While the median vote was for the overnight rate to stay at 1.00 percent over the longer term, diverging expectations about inflation and world events led one to call for a 0.25 percent overnight rate over the six-month and one-year horizons, while three members called for an overnight rate increase by March 2013.

Looking at Canada’s domestic performance, the group generally expected continued moderate growth, and saw the persistence of CPI inflation above target as consistent with a small and narrowing disinflationary output gap. Members read the most recent national accounts numbers as indicating continued domestic momentum, with some potential damping effects from fiscal contraction already in the past, and possible further support for the trade balance from the United States. Notwithstanding some signs of cooling in the housing market, Council members expressed concern about overheating, and gave relatively little weight to recent weak employment numbers from the Labour Force Survey that were inconsistent with other signs of strength in demand and employment.

The group’s assessment of the situation outside Canada’s borders was less buoyant. They noted that growth in the United States had surprised observers positively, but thought the need for fiscal consolidation would damp US expansion in 2013 and well beyond. They also noted signs of slowing growth in China, India, Brazil and Russia. The most acute concerns continued to be focused on Europe: notwithstanding recent better-than-expected activity in core countries and the European Central Bank’s aggressive action to forestall an immediate financial crisis, some Council members thought that sovereign defaults and exits from the euro were only a matter of time, with consequences severe enough to require further monetary stimulus from the Bank of Canada.

In thinking about the medium-term path for Canadian interest rates, several members felt that aggressively accommodative monetary policy on the part of most major central banks, and most particularly the US Federal Reserve, would keep the overnight rate lower for longer than they previously thought. Some emphasized the risks of domestic imbalances – particularly continued overinvestment in residential construction and higher consumer indebtedness – and continued overshooting of the inflation target, if the Bank of Canada followed the lead of other central banks. On balance, however, concerns about the impact of a higher overnight rate on the value of the Canadian dollar and the trade balance, confidence in well-anchored inflation expectations in Canada, and concerns about potential negative events abroad made most members comfortable with an overnight rate stable at 1.00 percent.

MPC Members March 8/2012         April 17/2012         6 months         12 months

Steve Ambler

Université du Québec à Montréal (UQAM)

1.00%            1.00% 1.25% 1.75%

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% 0.25% 0.25%

Angelo Melino

University of Toronto

1.00% 1.00% 1.00% 1.25%

Doug Porter

BMO Capital Markets

1.00% 1.00% 1.00% 1.00%

Nicholas Rowe

Carleton University

1.00% 1.00% 1.00% 1.00%

Pierre Siklos

Wilfrid Laurier University

1.00% 1.00% 0.75% 1.00%

Andrew Spence

TD Securities

1.00% 1.00% 1.00% 1.00%

Craig Wright

RBC Financial Group

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

 

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 April 12, 2012, prior to the Bank of Canada’s interest rate announcement on April 17, 2012

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

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