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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 July 19, 2011


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July 14, 2011 — 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 July 19, 2011. The Council further recommended holding the target rate at 1.25 percent at the following announcement on September 7, 2011, followed by increases that would take it to 1.75 percent in January 2012 and 2.25 percent in July 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 July 19 reflected a split between 5 participants urging an increase to 1.25 percent and 4 urging no change. Differing assessments of the state of the Canadian economy, the firmness with which inflation expectations are anchored at 2 percent, and the seriousness of risks abroad showed in the range of recommendations over longer time periods. By July 2012, calls for the overnight rate target ranged from a low of 1.75 percent to a high of 3.00 percent.

The principal theme of the group’s discussion was the contrast between the Canadian domestic scene, which most attendees felt justified a more restrictive stance by the Bank, and potential risks abroad – among them softness in the US economy and, most particularly, threats of sovereign debt defaults and associated financial-market trauma.

Looking domestically, several participants stressed that the disinflationary output gap produced by the recent crisis may be smaller and closing more quickly than the Bank and other forecasters had expected. One participant said Canada already had an inflationary gap, and several others pointed out that the overnight rate needs to move some distance toward a more neutral level, and should start moving soon.

Looking abroad, participants generally agreed that the potential negative impact on global growth and on financial conditions in Canada and elsewhere of sovereign debt defaults was enormous, but they differed in their views about how the Bank of Canada should respond to this prospect. Some argued for more accommodative policy on the grounds that inflation expectations are well anchored and the Bank should support domestic demand. Others stressed the risks of postponing needed tightening for too long in preparation for events that might not occur.

Notwithstanding their diverging views, the group was unanimous in recommending an upward path for the overnight rate target over the coming year. Risks abroad, the prospect that the US Federal Reserve will not raise its policy rate soon, and the drawbacks of shocking market participants with an immediate increase motivated several participants to recommend no or small increases in the nearer term. Among those who wanted earlier and larger increases, the need for the Bank to communicate better its determination to bring inflation back to target, even at the cost of surprising the market, was a stronger consideration.

The table shows the median votes and individual recommendations for the overnight rate at the July 19, 2011 setting and the September 7, 2011 setting, as well as the group’s views about the target in 6 and 12 months’ time.

MPC Attendees
July 19     
Sept. 7     
6 months
12 months

Steve Ambler

Université du Québec à Montréal (UQAM)

1.25% 1.50% 1.75% 2.50%

Ryan Bohren

BofA Merrill Lynch Global Research

1.25% 1.50% 2.25% 3.00%

Paul Ferley

RBC Financial Group

1.00% 1.25% 1.75% 2.50%

Michael Gregory

BMO Capital Markets

1.00% 1.00% 1.50% 2.00%

Angelo Melino

University of Toronto

1.00% 1.25% 1.50% 2.25%

Christopher Ragan

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

1.25% 1.50% 2.00% 2.50%

Nicholas Rowe

Carleton University

1.25% 1.25% 1.50% 1.75%

Pierre Siklos

Wilfrid Laurier University

1.25% 1.25% 1.75% 2.25%

Andrew Spence 

TD Securities

1.00% 1.00% 1.25% 1.75%
Median Vote 1.25% 1.25% 1.75% 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 1, 2011, prior to the Bank of Canada’s interest rate announcement on September 7, 2011.

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

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