The C.D. Howe Institute’s Monetary Policy Council is callinng on the Bank of Canada to maintain its target for the key overnight interest rate at 2.50% when it makes its announcement next week.

A strong majority of MPC members want to see the overnight-rate target held steady at the bank’s April 12 setting and at the following setting in May. Only Nicholas Rowe from Carleton University deviated from that stance, recommending a 25 basis point cut to 2.25% at the April meeting.

Looking ahead to the May meeting, there’s a slight bias to higher rates, with three of 10 economists calling for a rate of 2.75%, and the rest calling for 2.50%.

“While manufacturing and demand in central Canada are performing somewhat better in the face of a high dollar than had been generally expected, and capacity constraints exist in the West, the group felt that Canada’s aggregate demand continues to run slightly below the economy’s productive capacity, and that this situation is likely to persist through the balance of 2005,” it said in a press release. “With higher commodity prices showing little sign of spilling over into core inflation and wages, the group saw continued monetary stimulus as consistent with consumer price-index increases of 2% over the forecast period.”

It notes that some members of the group felt that further increases in the Canada-U.S. dollar exchange rate, perhaps triggered by abrupt losses of confidence in the U.S. dollar, might require a lower overnight rate later in the year.

“Most members, however, continued to think that the trend in the overnight rate should be up over time, as it converges with the level that is compatible with 2% inflation over the long term,” it said. “For those who favoured a higher overnight rate target in the nearer term, a stronger-than-expected resurgence in business investment — which would put pressure on productive capacity in the medium term before enhancing it in the longer term — stood out as a significant risk.”

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% inflation target. The recommendation of the MPC is the median of the votes cast by individual members. William Robson, the Institute’s senior vice president and director of research, chairs the Council.