The Bank of Canada should maintain its target for the key overnight interest rate at 2.5% when it makes its next announcement on July 12, the C.D. Howe Institute’s Monetary Policy Council recommended Thursday. However, the MPC is leaning toward a 25 basis point hike at the following meeting.

Four of the six MPC members attending the session voted for no change to be made in the overnight-rate target at the Bank’s meeting next week. Don Drummond, TD Bank Financial Group, Angela Redish, University of British Columbia, Warren Jestin, Bank of Nova Scotia, and Craig Wright of RBC Financial Group, said the Bank should leave rates unchanged. Nicholas Rowe from Carleton University and David Laidler of the University of Western Ontario both called for a 25 bps hike to 2.75%.

The 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 September, based on information currently available and assuming their individual recommendations for the upcoming setting were followed. The median response was 2.75%. Drummond, Redish and Wright all suggested that rates should be hiked to 2.75% in September. Rowe and Laidler suggested that, assuming the Bank hikes next week, rates should stay at 2.75% in September. Only Jestin said that the rate should still be 2.5% in September.

As for the upcoming meeting, they argued that output growth in Canada is unlikely to outpace growth in the economy’s productive capacity in the medium term. “With housing and consumer spending already very strong, they judged that some flagging would likely offset possible upsurges in investment on structures, and that a sudden emergence of an inflationary output gap was improbable,” the MPC reported. “Group members noted survey evidence of higher inflation expectations, but were inclined to think that these responses gave too much weight to headlines about higher energy prices and neglected disinflationary pressures in other markets.”

Looking ahead to September, “Many took the view that the overnight rate is below the level that is compatible with stable inflation in the long term. Like the members who urged an immediate hike in the target, they felt that further delay in raising the rate would be unwise, especially in view of continued strong domestic demand, and disappearance of the drag on output from weak exports in the wake of the Canadian dollar’s earlier appreciation.”

The 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.

www.cdhowe.org