Group urges BoC to keep rate promise - for now
The Bank of Canada should keep the overnight interest rate as is in April, but aim for a target interest rate of 1.25 per cent by October and 2.50 per cent by April 2011, the C.D. Howe Institute's Monetary Policy Council recommended.
Nine of the ten members of the Council - which provides an independent assessment of the Bank of Canada's strategy to reach a two per cent inflation target - recommended the Bank keep the key interest rate at 0.25 per cent for the time being.
But for the next announcement in June, the council was split on how the central bank should proceed. Six recommended the rate still be held at 0.25 per cent, while the four remaining members were split between wanting a 0.5 per cent and 0.75 per cent target rate. The Council's formal recommendations to the Bank of Canada are based on the group's median votes on rate changes.
In a report, the Council said members who favoured the Bank stay with its commitment tended to "highlight the role of emergency stimulus and inventory swings in recent growth numbers" while noting that the disappearance of one-time factors affecting prices will cause year-over-year inflation to moderate.
In contrast, members who wanted the Bank to raise the policy rate sooner and more steadily said domestic demand and inflation are running ahead of what was expected when the Bank's commitment to keep rates low was made, adding the yield curve and money growth rates are "consistent with continued expansion."
"In general, the strongest sentiment was that credibility in controlling inflation should be the Bank of Canada's paramount consideration," the report said. "There was strong sentiment in favour of the Bank's signaling clearly that monetary policy is likely to become much less accommodative as it exits its emergency stance."
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