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C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Raise Overnight Rate to 1.25 Percent on January 18, 2011

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Toronto, January 13 — 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 1.25 percent at its next announcement on January 18, 2011. The Council further recommended holding the target rate at 1.25 percent at the following announcement on March 1, 2011, followed by increases that would take it to 2.00 percent in July 2011 and 2.50 percent in January 2012.

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. The recommendation for January 18 reflected a split vote, with four of the nine members attending the meeting urging an unchanged target, and five recommending an increase to 1.25 percent. The range of recommendations among MPC members tended to increase as the time horizon extended. In their calls for the March 1 setting, three members urged a target of 1.00 percent, three urged 1.25 percent and three urged 1.50 percent. Recommendations for the target in January 2012 ranged from 2.00 percent to 3.00 percent.

While the contrasts in calls for the upcoming and future overnight-rate settings reflected MPC’s differing assessments of economic conditions in Canada and abroad, and the consequent outlook for inflation, the divergences among the members were less pronounced on this occasion than when the group met to discuss the Bank of Canada’s last setting in December. Recent indicators of demand and production in the United States and overseas mitigated concerns about near-term dips in activity or deflation. The group noted continued concern over sovereign debt in Europe, but on balance felt that the importance of these risks as factors in Canadian policymaking had diminished since late 2010. Differences in outlook produced different calls for the overnight rate’s level in a year’s time, but the one-percentage-point spread between the highest and lowest calls on this occasion was noticeably narrower than its equivalent in December.

The appropriate path for the Bank of Canada as it moves its policy rate up from the abnormally low levels adopted in response to the financial crisis to a level consistent with stable inflation over the long term was a key focus of the MPC’s discussion. Some members urged more explicit statements from the Bank about its intentions, and the question of whether market expectations for the timing of moves, and in particular their consequences for the exchange rate, should affect the Bank’s path was a lively one. On balance, the call for an immediate upward move reflected a view among several participants that recent economic news had weakened the argument for a longer pause before raising the overnight rate to more normal levels.

The table shows the median votes and individual recommendations for the overnight rate at the January 18, 2011 setting and the March 1, 2011 setting, as well as the group’s views about the target in 6 and 12 months’ time.

MPC Members Jan. 18 Mar. 1 6 months 12 months

Sheryl King

BofA Merrill Lynch Global Research

1.25%           1.50%           2.00%           2.75%     

Thorsten Koeppl

Queen’s University

1.25% 1.50% 2.25% 3.00%

Angelo Melino

University of Toronto

1.25% 1.50% 2.00% 2.75%

Doug Porter

BMO Capital Markets

1.00% 1.00% 1.50% 2.00%

Christopher Ragan 

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

1.25% 1.25% 2.00% 3.00%

Nicholas Rowe

Carleton University

1.25% 1.25% 1.75% 2.00%

Avery Shenfeld

CIBC World Markets Inc.

1.00% 1.00% 1.75% 2.00%

Pierre Siklos

Wilfrid Laurier University

1.00% 1.25% 1.75% 2.50%

Craig Wright

RBC Financial Group

1.00% 1.00% 2.00% 2.50%
Median Vote 1.25% 1.25% 2.00% 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 February 24, 2011, prior to the Bank of Canada’s interest rate announcement on March 1, 2011.

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

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