The Bank of Canada should raise its target for the key overnight interest rate to 2.75% when it makes its next rate announcement on Sept. 7, the C.D. Howe Institute’s Monetary Policy Council has recommended.

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. William B.P. Robson, the institute’s senior vice president and director of research, chairs the council.

A vote taken by the council was nearly unanimous, with nine of the 10 MPC members attending the session voting for the 25 basis point increase. The only holdout was Warren Jestin, economist at Bank of Nova Scotia.

The institute said the group felt that, notwithstanding weakness in some sectors, there is little or no slack in the Canadian economy at present, and the time is right for the Bank of Canada to move the overnight rate toward the level that is compatible with steady growth and stable inflation over the long term.

Looking ahead to the following interest rate setting in October, six of the 10 members voted for a further increase in the overnight-rate target to 3%. The others voted for 2.75%, apart from Jestin, who remained at 2.5%. “Those who did not favour the increase tended to point to continued subdued core inflation numbers, and some thought that recent and prospective increases in the Canadian dollar would slow the economy,” the institute said.

It also reported the group debated the impact of Hurricane Katrina on the outlook. “While some emphasized the negative effects of the damage, especially to energy production, others argued that its positive implications for Canadian exports were more important,” the institute said.

“While less critical for near-term monetary-policy actions, the low level of long-term interest rates also spurred discussion,” it said. “Some noted that the current very low level of long-term rates might not be sustainable. On the whole, however, the group tended to think that the overnight rate that is compatible with stable 2% inflation has come down somewhat, and that its cumulative increase during this cycle will be relatively modest.”

The MPC’s next vote will take place on Oct. 13, prior to the Bank of Canada’s interest rate announcement on Oct. 18.