Not the right time for BoC rate hike, says C.D. Howe council

The Bank of Canada should keep its target for the overnight rate at 0.5% next week, says C.D. Howe Institute’s Monetary Policy Council. The BoC makes its next policy announcement on October 19 and will also release a Monetary Policy Report.

The council’s call for the BoC to hold at 0.5% until April 2017 is unanimous. Meanwhile, its call for a hike to 0.75% by October 2017 was a close decision, with five of the nine council members preferring that approach; the other four prefer a rate unchanged at 0.5% at that time (click here to see a vote breakdown).

The council includes financial experts from major banks and universities, and seeks to make recommendations for upcoming Bank’s of Canada interest-rate announcements.

The council says in its release that the world economy and the U.S. are continuing to expand at a moderate pace, with higher oil prices improving the environment for Canada. But, global trade and capital investment in major countries worldwide are disappointingly sluggish.

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Further, members underlined several policy concerns, including the growing likelihood of a hard Brexit and uncertainty about the impact of the U.S. presidential election.

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On the domestic front, council members expect demand and output to grow in the second half of 2016 and into 2017. However, they predict Canadian business investment won’t respond to capacity constraints, and that has negative implications for Canada’s future productive capacity.

Read: Canadian economy more vulnerable than in 2007-2008

Finally, the outlook for Canadian inflation reinforces the group’s tendency to recommend an unchanged target rate, due to slow increases in wages and core inflation being balanced by the prospect of higher energy prices.

Looking forward, several council members also find that recent changes in the rules for federal-government mortgage insurance may mitigate the risks of Canadian households becoming further indebted, removing one reason for the Bank of Canada to hike earlier. The effect of government spending on infrastructure is also a consideration, as is the actions of the U.S. Federal Reserve over the next year.

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