C.D. Howe Institute recommends a rate freeze of at least six months
In a majority vote, the C.D. Howe Institute’s Monetary Policy Council (MPC) called on the Bank of Canada to hold its benchmark policy interest rate at 4.5% on March 8 and keep it at that level for the next six months.
The MPC also recommended a rate cut to 4.25% by March 2024, following its assessment of a trajectory that would be consistent with the central bank’s stated inflation target of 2%.
The MPC said that a significant part of the challenge in assessing what rate level would best fit the BoC’s goal is the interpretation of recent economic data.
“Unusual seasonal factors in late 2022 and early 2023 might have distorted some numbers, notably on labour-force and employment, in both Canada and the United States,” the MPC said. “A number of [MPC] members noted that lingering impacts of the pandemic, and increases in temporary and permanent immigration in Canada, complicated judgements about how quickly productive capacity is expanding.”
Some quarters of the council expressed concerns surrounding weak business investment and poor productivity growth, which could lead to the Canadian economy ultimately stalling. Such an event would force the BoC “to adopt a more restrictive stance than would otherwise be needed to bring inflation back to target,” the MPC said.
The reliability of various official measures is also crucial in determining whether the rates are actually working to bring down inflation in the first place.
“Some members advocated paying more attention to measures that strip out, or give less weight to, products that are more prone to supply disruptions, and mortgage interest costs, which tend to rise when interest rates rise,” the MPC explained. “Others advocated paying more attention to broader measures, not least because the inflation target is for the total CPI.”
The MPC is looking to conduct its next vote on April 6, right before the BoC’s overnight rate announcement on April 12.