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C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Raise Overnight Rate to 0.75 Percent, With Increases to 1.50 in January and 2.25 Percent by July 2011


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Toronto, July 15 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada raise its target for the overnight interest rate (the very short-term money-market rate the Bank targets for monetary policy purposes) to 0.75 percent at its next announcement on July 20, 2010. The Council recommended further increases over the coming year, recommending an overnight rate target of 2.25 percent in July 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 recommendation is its median vote. Seven of the eleven members attending the meeting recommended a target of 0.75 percent next week, while four recommended 1.00 percent. For the announcement in September, five urged a target of 1.00 percent, five urged 1.25 percent, and one called for 1.50 percent. As the group looked further ahead, divisions of opinion became stark. Asked for their views about the appropriate target in six months’ time, four at the low end favoured a target of 1.25 percent, while four at the high end favoured a target of 2.00 or more. Looking a year out, opinions ranged from 1.75 percent to 3.75 percent.

MPC members were unanimous in recommending a steady series of overnight rate increases over the coming year, as the current disinflationary output gap in the Canadian economy narrows, and the emergency stance adopted after the 2008 financial crisis becomes less appropriate. Disagreement over the path for the target arose from both shorter- and longer-term considerations.

Members favouring an overnight rate at the lower end of the range a year out tended to emphasize economic weakness abroad, which would dampen growth in Canada in the near term and make the overnight rate that is consistent with stable inflation lower in the long term. Some in this group also highlighted recent signs of weakening domestic demand, such as housing-market indicators, which they saw as justifying only gradual withdrawal of monetary stimulus.

Members favouring an overnight rate at the higher end of the range tended to emphasize the robustness of Canada’s recovery, and the need to get the overnight rate back to a sustainable level before inflationary pressure could build. Some members in this group highlighted the effectiveness of past Bank of Canada actions in fostering recovery, current rapid growth in narrow money, and forecast and financial-market indicators that inflation is expected to exceed 2 percent in the next few years.

Not withstanding their diverse views, Council members felt that the Bank’s future statements should emphasize the desirability of a substantial increase in the overnight rate as the emergency stimulus of the past year and a half becomes increasingly inappropriate.

The table shows the median votes and individual recommendations for the overnight rate at the July 20, 2010 setting and the September 8, 2010 setting, as well as the group’s views about the target in 6 and 12 months’ time.

MPC Members
July 20     
Sept. 8     
6 months     
12 months     

Edward A. Carmichael

Ontario Municipal Employees’ Retirement System (OMERS)     

1.00% 1.25% 2.00% 3.00%

David Laidler

University of Western Ontario

.75% 1.25% 1.75% 2.75%

Angelo Melino

University of Toronto

.75% 1.25% 2.50% 3.50%

Michael Parkin

University of Western Ontario

1.00% 1.50% 2.00% 3.75%

Doug Porter

BMO Capital Markets

.75% 1.00% 1.25% 1.75%

Angela Redish

University of British Columbia

1.00% 1.25% 2.00% 2.50%

Nicholas Rowe

Carleton University

.75% 1.00% 1.50% 2.00%

Avery Shenfeld

CIBC World Markets Inc.

.75% 1.00% 1.25% 1.75%

Pierre Siklos

Wilfrid Laurier University

1.00% 1.25% 1.50% 2.00%

Andrew Spence

TD Securities

.75% 1.00% 1.25% 2.00%

Craig Wright

RBC Financial Group

.75% 1.00% 1.25% 2.25%
Median Vote .75% 1.25% 1.50% 2.25%


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 September 2, 2010, prior to the Bank of Canada’s interest rate announcement on September 8, 2010.

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


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