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Monetary Policy Council Urges Bank of Canada to Hold Overnight Rate at 1.00 Percent at Next Setting; Looks for 1.25 by April 2015


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April 10, 2014 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada keep its target for the overnight rate, the very short-term interest rate it targets for monetary policy purposes, at 1.00 percent at its next announcement on April 16, 2014. Looking ahead, the Council called for the Bank to hold the target at 1.00 percent through the fall of this year, but called for a target of 1.25 by April 2015.

The MPC provides an independent assessment of the monetary stance appropriate for the Bank of Canada as it aims for its 2 percent inflation target. William Robson, the Institute’s President and Chief Executive Officer, chaired the Council’s 85th meeting.

MPC members make recommendations for the Bank of Canada’s upcoming interest-rate announcement, the subsequent announcement, and the announcements six months and one year ahead. The Council’s formal recommendations for each announcement ­­are the median votes of the members.

The call for a 1.00 target for the upcoming announcement and at the subsequent announcement in June was unanimous, with all nine of the MPC members attending the meeting supporting it. Looking ahead to the October 2014 setting, seven members favoured another setting at 1.00 percent, while two favoured an increase to 1.25 percent. By April 2015, two members still called for a target of 1.00 percent, while three called for 1.25 percent and four called for 1.50 percent.

The tone of the group’s discussion of Canada’s economic outlook was cautiously positive. Members tended to feel that domestic demand would continue to grow at a steady pace after the weather-related dip in activity early in the year, and several commented positively on the likely contribution to growth from business investment and net exports in coming quarters. Notwithstanding some uncertainty about why inflation had been as high as it was during the early part of the recovery and as low as it has been more recently, the group generally felt that a mixture of output closer to capacity and one-time factors would bring CPI inflation back to target by late 2014 or early 2015.

In discussing risks to the outlook, Council members touched on the potential for a slowdown in China and the possibility of negative impacts in Europe from adverse developments in Ukraine and Russia, but neither possibility loomed large enough to affect the stance of Canadian monetary policy. The key reason for not preferring a faster move in the overnight rate back to more normal levels was the expectation that growth, while positive, will remain mediocre, and that inflation will return to target only slowly. Some members also indicated their preference for the Canadian dollar to stay close to the US$ 0.90 level, and urged the Bank of Canada not to do or say anything that would push it up.

Concerns about the exchange rate also coloured the group’s discussion of how the Bank of Canada should talk about the possible future path of the overnight rate. Some members felt that the Bank should signal that the rate will likely move up over time. The majority, however, thought that neutral language – or no forward guidance at all – was the better course, at least at the upcoming announcement.

The following table shows the votes of each MPC member, as well as the Council’s median vote, for the relevant Bank of Canada policy-rate announcements.

MPC Members Apr. 16      June 4      6 months      12 months

Steve Ambler

Université du Québec à Montréal (UQAM)     

1.00% 1.00% 1.00% 1.50%

Thorsten Koeppl

Queen’s University

1.00% 1.00% 1.25% 1.50%

Stéfane Marion

National Bank

1.00% 1.00% 1.00% 1.25%

Angelo Melino

University of Toronto

1.00% 1.00% 1.00% 1.25%

Doug Porter

BMO Capital Markets

1.00% 1.00% 1.00% 1.00%

Nicholas Rowe

Carleton University

1.00% 1.00% 1.00% 1.50%

Avery Shenfeld

CIBC World Markets Inc.

1.00% 1.00% 1.00% 1.00%

Pierre Siklos

Wilfrid Laurier University

1.00% 1.00% 1.25% 1.50%

Craig Wright

RBC Financial Group

1.00% 1.00% 1.00% 1.25%
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 May 29, 2014, prior to the Bank of Canada’s interest rate announcement on June 4, 2014.

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

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