July 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 July 16, 2014. Looking ahead, the Council called for the Bank to hold the target at 1.00 percent through the rest of 2014, but called for a target of 1.75 by July 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 87th 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 attending the meeting.
The MPC’s call for a 1.00 target in the upcoming announcement and in the subsequent announcement in September was unanimous. Looking ahead to the January 2015 setting, five members favoured holding the target at 1.00 percent, while three favoured an increase to 1.25 percent and one favoured 1.50 percent. By July 2015, the range had widened further, with one member favouring 1.00 percent, three favouring 1.25 percent, and five favouring 1.75 percent.
The dominant topic in the group’s discussion was uncertainty about the relationship between aggregate demand in Canada and the economy’s productive capacity. Key questions were the current size of the gap between output and capacity – critical in deciding whether recent up-side surprises in inflation are likely to be temporary – and how rapid growth in productive capacity is likely to be in the medium term. Views varied, but consistent themes in many members’ comments were that demographic change has lowered the trend rate of capacity growth, and that early estimates of the post-crisis disinflationary output gap were too large.
Mixed economic data – particularly the conflicting signals coming out of employment and output indicators in both Canada and the United States – along with concerns about potential political and economic setbacks to global growth, tempered the group’s enthusiasm for early increases in the overnight rate. By early 2015, however, a significant minority expected Canada’s economic situation and inflation to warrant some increase in the overnight rate, and all but one member thought the overnight rate should be higher in a year’s time.
MPC members also spent time on the challenge that domestic imbalances – notably financially stretched households and continued high rates of residential investment – pose to the conduct of monetary policy. Several members noted that fluctuations in household credit and spending affect inflation, and that past policy-rate settings were important in producing the current situation. The dominant theme of members’ comments, however, was that the outlook for inflation should be the critical determinant of the overnight rate. While indications of bias in its communications might give the Bank of Canada more scope to use that tool, the group generally looked to other institutions and policies to manage domestic imbalances
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.