C.D. Howe Institute suggests increase in March the best path forward
The Bank of Canada should maintain its goal for the overnight rate, its benchmark policy interest rate, at 4.25% on January 25th, according to the Monetary Policy Council (MPC) of the C.D. Howe Institute. In addition, the Council suggested that the Bank increase its target overnight rate to 4.50% at the next announcement in March, maintain it there until July, and then reduce it to 4.25% by January 2024.
The Bank of Canada's council members provide suggestions for the announcements that will be made soon, six months, and a year from now. The median vote of those in attendance serves as the formal recommendation for each pronouncement by the Council.
The suggestion is rounded in the direction of the prior setting when the median vote does not increase by 25 basis points, as it did this time for the next setting.
The Council also expresses an opinion on whether the Bank should continue, slow down, or accelerate the anticipated decline in its holdings of Canadian government bonds. Most voters wanted the Bank to continue reducing at its anticipated rate.
For the Council's decision on the future announcement, the tie-breaking rounding of a split vote in favour of the previous setting mattered, with four of the eight members present favouring a goal for the overnight rate of 4.25% and four favouring a target of 4.50%. Three members favoured 4.25%, four favoured 4.50%, and one favoured 4.75% in the vote for the March setting.
The range had broadened by July, when two members called for a further increase to 4.75% and one member proposed lowering the overnight rate to 4.00%. With two members advocating for a rate of 3.75% and one pushing for a rate of 5.00% by January 2024, the range around the 4.25% median vote had grown even further.
Currently, the Bank of Canada's approach to its holdings of Canadian government bonds is to do nothing but wait for them to mature before adding to them. The Bank of Canada was urged to speed up the decrease by selling bonds between now and the date of its next announcement of the overnight rate, while the other six council members urged the Bank to stick to its current plan.
The MPC's votes on the impending overnight rate setting were evenly divided, and the widening range around the median votes for future settings indicated that there were differing opinions among the committee as to how much more monetary constraint was required to get inflation back on target. This division was caused in part by divergent opinions on outside circumstances, such as the impact of China's reopening from COVID and further pressure on food and energy prices from Russia's invasion of Ukraine.
The severe slowdown in monetary aggregates, indications of waning consumer demand, and a weaker property market were among the data highlighted by the group favouring no more hikes in the overnight rate goal and reduction over the upcoming year. The fact that recent weakening in the monetary aggregates has not negated prior expansion and that the labour market is still tight were two of the signs highlighted by the group in favour of additional increases in the overnight rate.
Members raised the possibility of using bond sales to demonstrate the Bank's commitment to bringing inflation back to goal while also noting that the bond market rise over the last three months has eased financial conditions generally and kept mortgage rates low in particular. Other participants pointed out that between now and the next announcement date, a sizable number of bonds will mature, and other participants claimed that the uncertainty surrounding US fiscal and debt-management strategy may make this a poor time to sell bonds.
The MPC will vote again on March 2, 2023, before the Bank of Canada announces its interest rate on March 8.