The Bank of Canada should maintain its target for the overnight rate at 2.5% when it makes its next interest announcement, says C.D. Howe Institute’s Monetary Policy Council.

The central bank’s next announcement is scheduled for March .

MPC is 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% inflation target.

Most MPC members recommended leaving the overnight-rate targets unchanged for the March announcement. However, one member recommended a 25 basis point cut, while another called for a 25 bps hike.

Overall, the panel judged that demand in Canada is running slightly below the economy’s productive capacity, and saw recent indicators of softness as pointing to a small disinflationary output gap through the end of the year. While there are signs of price pressure in some indexes, most notably the gross domestic product chain index, other indicators, such as wages, are more benign, they noted.

Most MPC members therefore saw continued monetary stimulus as consistent with the Bank keeping the consumer price index on its 2% target over the forecast period.

The C.D. Howe Institute says most MPC members thought that the trend of short-term interest rates will be upward in the coming years, and many argued that softness of investment and household demand shows that the overnight rate compatible with steady inflation is currently relatively low.

Members of the MPC were also asked for their preferred level for the Bank of Canada’s overnight rate target at its next setting in April 2005. The median response was 2.50%.