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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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May 31, 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 June 5, 2012. The MPC further recommended that the Bank hold the overnight rate target at 1.00 through the end of the year, and called for a target of 1.25 percent by June 2013.

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. On this occasion, the median numbers resulted from a pronounced split between MPC members who saw a weakening world economy, disinflationary pressures, and the prospects for a eurozone-centred financial crisis as justifying an unchanged rate, and members who thought that domestic conditions in Canada warranted a return of the rate to more normal levels. By June 2013, five of the 10 members attending the meeting called for an overnight rate target of 1.00 percent, while the other five called for a target between 1.50 and 2.50 percent.

In looking at the domestic economy, many members felt that Canada could anticipate continued growth of demand and output at rates in line with, or slightly above, the speed of capacity growth. Some members emphasized continued robust household borrowing and a tilt in Canadian demand toward consumer spending and residential investment – this group was likelier to urge moving the overnight rate to a level consistent with stable inflation at 2 percent. Others noted signs of slower growth in the United States and especially overseas, and argued that softening prices for energy and food, and a weakening of Canada’s terms of trade, made a case for the overnight rate to stay at a stimulative level

For the most part, the discussion centred on the risks of a breakdown in the Eurozone – with a Greek exit from the euro being the main, but not the sole potential catalyst – and how the Bank of Canada should respond. Even among the members who thought a breakdown was probable, there was no consensus about whether the Bank should keep the overnight rate low in anticipation of a negative shock to Canada, or move it up in line with domestic conditions, being ready to reverse if and when the crisis occurs. Disagreement on this score was more pronounced because of differing assessments of the damage a reversal could do to the Bank’s credibility: some members put a premium on clear communications about the Bank’s expectations as circumstances develop; others felt that past reversals in the Bank’s outlook had shaken investor confidence.

One point on which members generally agreed was that the Bank of Canada should more fully and clearly articulate its view about the balance of risks at home and abroad in its communiqués. With a stable overnight rate target having conveyed relatively little information for some time, and policy uncertainties dominating market sentiment, members wanted more information from the Bank about its expectations and contingent actions.

MPC Members June 5      July 17      6 months      12 months

Steve Ambler

Université du Québec à Montréal (UQAM)

1.00% 1.25% 1.50% 2.00%

Edward A. Carmichael 

Ontario Municipal Employees’ Retirement System (OMERS)

1.00% 1.00% 1.00% 1.00%

Thorsten Koeppl 

Queens University

1.25% 1.25% 1.75% 2.50%

Stéfane Marion

National Bank

1.00% 1.00% 1.00% 1.00%

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        

1.25% 1.25% 1.75% 2.25%

Nicholas Rowe

Carleton University

1.00% 1.00% 1.00% 1.00%

Pierre Siklos

Wilfrid Laurier University

1.00% 1.00% 1.00% 1.00%

Andrew Spence

TD Securities

1.00% 1.00% 1.00% 1.00%

Craig Wright

RBC Financial Group

1.00% 1.00% 1.25% 1.75%
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 July 12, 2012, prior to the Bank of Canada’s interest rate announcement on July 17, 2012.

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

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