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C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Maintain Overnight Rate at 1.00 Percent, With Increases to 1.50 in June 2011 and 2.50 Percent by December 2011


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Toronto, December 2 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada maintain its target for the overnight interest rate (the very short-term money-market rate the Bank targets for monetary policy purposes) at 1.00 percent at its next announcement on December 7, 2010. The Council also recommended holding the target rate at 1.00 percent at the following announcement on January 18, 2011, followed by increases that would take it to 1.50 percent in June 2011 and 2.50 percent in December 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 recommendations for each announcement date are its median votes. (When the median falls between two figures, as happened for the June and December 2011 figures on this occasion, the mean determines whether the recommendation is rounded up or down.) While there was a strong tendency among Council members to support an unchanged target on December 7th – when 10 of the 12 members attending the meeting supported no change – and on January 18, 2011 – when nine of the members supported no change – views diverged significantly as the group looked further out. Recommendations for the target in June 2011 ranged from 1.00 percent to 2.25 percent, and recommendations for the target in December 2011 ranged from 1.75 percent to 3.50 percent.

Both domestic and international considerations motivated the group’s strong support for an unchanged overnight rate in the near term. The group noted the trade-related weakness in recent Canadian growth numbers, and generally felt that inflation and inflation expectations in Canada remain well contained, with some arguing that the expiry of fiscal stimulus and the prospect of sustained fiscal retrenchment in major provinces would dampen growth in 2011 and beyond. Notwithstanding some encouraging growth figures in the United States and Europe, the discussion highlighted risks abroad, including fiscal retrenchment or even crisis.

While the group was unanimous in looking for a higher overnight rate target in a year’s time, they differed considerably about the appropriate level and the desirable pace of increases. Those supporting a higher level tended to feel that the long-term neutral level for the overnight rate was in the area of 3.50 to 4.00 percent. Many in this camp urged the bank to engineer a clear path to a neutral level before, or at least no later than, the disinflationary output gap in the Canadian economy closes in 2012, and tended to emphasize the desirability of clearer statements from the Bank of Canada about coming upward moves in the policy rate.

Those supporting a lower level in a year’s time tended to emphasize the likelihood of prolonged subdued growth and other factors that might make the neutral level of the overnight rate in Canada lower than in the past. Among this group, the argument that the uncertainties in the outlook created room for the Bank of Canada to pause longer carried considerable weight.

The table shows the median votes and individual recommendations for the overnight rate at the December 7, 2010 setting and the January 18, 2011 setting, as well as the group’s views about the target in 6 and 12 months’ time.

MPC Members
Dec. 7     
Jan. 18     
6 months     
12 months     

Edward A. Carmichael

Ontario Municipal Employees’ Retirement System (OMERS)     

1.00% 1.00% 1.25% 2.25%

Thorsten Koeppl 

Queens University

1.00% 1.00% 1.75% 3.00%

David Laidler

University of Western Ontario

1.00% 1.00% 1.50% 2.25%

Angelo Melino

University of Toronto

1.00% 1.25% 2.00% 2.50%

Michael Parkin

University of Western Ontario

1.25% 1.50% 2.25% 3.50%

Doug Porter

BMO Capital Markets

1.00% 1.00% 1.00% 2.00%

Christopher Ragan

University of British Columbia

1.00% 1.00% 1.75% 3.25%

Nicholas Rowe

Carleton University

1.25% 1.25% 1.75% 2.00%

Avery Shenfeld

CIBC World Markets Inc.

1.00% 1.00% 1.00% 1.75%

Pierre Siklos

Wilfrid Laurier University

1.00% 1.00% 1.75% 2.50%

Andrew Spence

TD Securities

1.00% 1.00% 1.50% 2.00%

Craig Wright

RBC Financial Group

1.00% 1.00% 1.50% 2.50%
Median Vote 1.00% 1.00% 1.50% 2.50%


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 13, 2011, prior to the Bank of Canada’s interest rate announcement on January 18, 2011.

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


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