C.D. Howe Institute’s Monetary Policy Council Urges Bank of Canada to Hold Overnight Rate at 1.00 Percent
TORONTO, July 12, 2012 /CNW/ – 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 it targets for
monetary policy purposes, at 1.00 percent at its next announcement on
July 17, 2012. The MPC further recommended that the Bank hold the
overnight rate target at 1.00 through January of 2013, and called for a
target of 1.50 percent by July of next year.
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 makes formal recommendations – its median vote – for the Bank of
Canada’s upcoming rate announcement, the subsequent announcement, the
announcement in six months’ time, and the announcement in one year’s
time. While all ten of the members attending the meeting called for a
1.00 percent target at the upcoming setting and nine of them supported
a 1.00 percent target at the next setting in September, views diverged
after that. Looking ahead to July 2013, only three of the members
supported a target of exactly 1.50 percent: the full range of views ran
from a low of 0.75 percent to a high of 2.50 percent.
In evaluating the near-term outlook for the Canadian economy, most
members agreed that domestic demand looked robust, but that weakness in
the United States and abroad would hurt Canadian growth more than
appeared likely six weeks ago. They were also close to consensus on the
likely damping effect of formal and informal changes in mortgage
lending rules, which many members saw as mitigating pressure on the
Bank to raise the overnight rate to restrain residential construction
and consumer borrowing. While there was some debate over the size and
significance of the disinflationary output gap in Canada, none of the
group saw any appreciable near-term threat that the Bank would
overshoot its inflation target.
The Council did disagree, however, about how the Bank should respond to
three major downside risks to the outlook: fiscal and financial crises
in Europe; the US “fiscal cliff” at the beginning of 2013; and a hard
landing in China. Some members argued that the Bank of Canada should
aim to return the overnight rate to a level more consistent with steady
growth and inflation under non-crisis circumstances, while making clear
its willingness and ability to reverse direction if a negative shock
occurred. Others felt that these risks justified holding the overnight
rate down, because these risks were already depressing confidence and
spending, and if the Bank of Canada became relatively tighter than
other central banks it could undesirably raise the foreign exchange
value of the Canadian dollar.
Members of the latter group tended to feel that the Bank of Canada’s
upcoming announcement should remove language indicating a bias toward
less accommodative monetary policy in the months ahead. The majority of
members, however, felt that a bias toward less accommodation should
remain in the language, and thought that the overnight rate should
return to more normal levels over time, a fact reflected in the median
call for a rate of 1.50 percent by July 2013.
______________________________________________________________________________________________________ |MPC Members | July| Sept.| 6 | 12 | | | 17 | 5 |months |months | |_________________________________________________________________________|_____|______|_______|_______| |Craig Alexander|1.00%|1.00% | 1.00% | 1.50% | |TD Bank Group | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Steve Ambler |1.00%|1.25% | 1.50% | 1.75% | |UniversitÃ© du QuÃ©bec Ã MontrÃ©al (UQAM) | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Edward A. Carmichael | | | | | |Ontario Municipal Employees' Retirement |1.00%|1.00% | 1.00% | 1.00% | |System (OMERS) | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Thorsten Koeppl |1.00%|1.00% | 1.75% | 2.50% | |Queens University | | | | | |_________________________________________________________________________|_____|______|_______|_______| |StÃ©fane Marion |1.00%|1.00% | 1.00% | 1.00% | |National Bank | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Angelo Melino |1.00%|1.00% | 1.00% | 1.50% | |University of Toronto | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Doug Porter |1.00%|1.00% | 1.00% | 1.25% | |BMO Capital Markets | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Christopher Ragan | | | | | |McGill University and David Dodge Chair in |1.00%|1.00% | 1.50% | 2.25% | |Monetary Policy, C.D. Howe Institute | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Nicholas Rowe |1.00%|1.00% | 1.00% | .75% | |Carleton University | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Craig Wright |1.00%|1.00% | 1.00% | 1.50% | |RBC Financial Group | | | | | |_________________________________________________________________________|_____|______|_______|_______| |Median Vote |1.00%|1.00% | 1.00% | 1.50% | |_________________________________________________________________________|_____|______|_______|_______|
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 August 30, 2012, prior to the
Bank of Canada’s interest rate announcement on September 5, 2012.
For release, go to http://www.cdhowe.org/mpc-july-12-2012-recommendations/18147
SOURCE C.D. Howe Institute