C.D. Howe Institute Monetary Policy Council Urges Bank of Canada to Hold Overnight Rate at 1.00 Percent for Next Six Months.

C.D. Howe Institute Monetary Policy Council Urges Bank of Canada to Hold Overnight Rate at 1.00 Percent for Next Six Months.

The C.D. Howe Institute’s Monetary Policy Council (MPC) recommends 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 September 3, 2014. Looking ahead, the Council called for the Bank to hold the target at 1.00 percent through the spring of 2015, but called for a target of 1.50 a year from now.

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 the Institute’s President and Chief Executive Officer, chaired the Council’s 88th meeting.

The group generally took a positive view of Canada’s current economic performance, expecting a solid reading for second-quarter real GDP (a key economic release between the MPC meeting and the Bank of Canada’s announcement), continued progress in closing the gap between actual and potential output, and inflation expectations well anchored at the Bank’s 2 percent target. Looking abroad, members noted that disappointing news out of Europe and Japan was more than balanced by positive US growth. While some members noted that the Canadian dollar looks higher than Canada’s terms of trade would support, many expected improvements in net exports and more buoyant business investment to complement continued spending growth on the part of Canadian households in the months ahead.

In drawing conclusions about the conduct of Canadian monetary policy, however, the group wrestled with two major types of questions: about the size, duration and even the significance of the output gap; and about the “normal” level for the overnight rate – the rate that would be appropriate if the output gap were zero and inflation were at 2 percent.

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