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C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Hold Overnight Rate at 1.00 Percent

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December 1, 2011 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada maintain its target for the overnight rate, the very short-term interest rate the Bank targets for monetary policy purposes, at 1.00 percent at its next announcement on December 6, 2011. The risks that Europe’s fiscal problems pose to the international financial system and the world economy are so severe that the MPC called for the Bank’s overnight rate to stay at 1.00 percent through the end of 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 call for an unchanged target on December 6 was virtually unanimous, with strong majorities also supporting no change through mid-2012. Sentiment diverged somewhat over the long time horizon: by December 2012, six members still called for a rate of 1.00 percent, while three called for a rate between 1.50 and 2.00 percent, and two called for a rate of 0.75 or less.

The decision to urge no change reflected a tension, in the minds of many individual members as much as in the group as a whole, between two considerations: somewhat better than expected recent growth in North America, which would ordinarily argue for a higher policy rate to rein in inflation, on the one hand, and acute concerns that a fiscally-driven financial crisis in Europe will produce a global slump that will require aggressive easing by all central banks, the Bank of Canada among them. One member thought the Bank of Canada should anticipate a European collapse with a rate cut. Others, driven by differing assessments of the seriousness and timing of European developments, felt the Bank should move only when, or if, the collapse occurs.

In its discussion of developments affecting the Canadian economy and inflation, many in the group commented on relatively robust indicators of economic activity in Canada and the United States, and the prospects for spending growing at a rate close to growth of the economy’s productive capacity into early 2012. The discussion highlighted some risks of unsustainable lending and building activity related to residential housing, and the need for considerable easing in energy prices if Canada’s CPI is to return to target as quickly as the Bank of Canada has forecast.

Notwithstanding those arguments in favour of a higher target for the overnight rate, Europe’s slide into recession, the likely intensification of its financial crisis, and the huge potential hit to global growth inclined the group to urge no change. Several members mentioned that the credibility of its commitment to 2 percent inflation gave the Bank additional scope to delay an increase, and thus help buffer Canada from the consequences of a European collapse.

The table shows the median votes and individual recommendations for the overnight rate at the December 6, 2011 setting and the January 12, 2012 setting, as well as the group’s views about the target in 6 and 12 months’ time.

MPC Members Dec. 6/11 Jan. 17/12 6 months 12 months

Steve Ambler

Université du Québec à Montréal (UQAM)

1.00% 1.00% 1.00% 1.00%
Edward A. Carmichael 

Ontario Municipal Employees’ Retirement System (OMERS)
1.00% 1.00% 1.00% 1.00%
Sheryl King

BofA Merrill Lynch Global Research
1.00% 0.50% 0.25% 0.25%
Thorsten Koeppl 

Queens University
1.00% 1.00% 1.00% 2.00%
Angelo Melino

University of Toronto
1.00% 1.00% 1.25% 1.75%
Doug Porter

BMO Capital Markets
1.00% 1.00% 1.00% 1.00%
Nicholas Rowe

Carleton University
0.50% 0.50% 0.50% 0.75%
Avery Shenfeld

CIBC World Markets Inc.
1.00% 1.00% 1.00% 1.00%
Pierre Siklos

Wilfrid Laurier University
1.00% 1.00% 1.00% 1.00%
Andrew Spence

TD Securities
1.00% 1.00% 1.00% 1.00%
Craig Wright

RBC Financial Group
1.00% 1.00% 1.00% 1.50%
Median Vote 1.00% 1.00% 1.00% 1.00%

 

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 January 12, 2012, prior to the Bank of Canada’s interest rate announcement on January 17, 2012.

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

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