Central bank should raise key interest rate, expert group says
The Bank of Canada should raise the key overnight interest rate by a quarter percentage point to 3.25 per cent on July 15, the C.D. Howe Institute's monetary policy council recommended Thursday.
But the council, seven academics and one member each from a bank and a Bay Street investment house, was split on the recommendation. Four opted to hold the rate at three per cent, four wanted the quarter-point increase and one recommended going to 3.5 per cent.
The council adopts the median as its recommendation. The overnight rate is the rate big banks charge each other for overnight loans.
The split was based on the differing views of the main problem facing the economy: inflation or weakening demand.
"Notwithstanding the division in opinion regarding the Bank of Canada's July 15 decision, the main theme of the group's discussion was concern about rising inflation and rising inflation expectations," the institute said.
Oil prices, the likelihood that consumer price index will move beyond the bank's target of one to three per cent, evidence of inflation expectations in a recent bank survey and wage increases above inflation "all featured prominently in the discussion."
On the other side, members opposed to an increase cited the weakness in domestic demand, uncertain credit and financial conditions and the belief that higher energy and food prices are temporary.
Even the members favouring no increase or a moderate one said the bank should make it clear that it will act firmly to attack inflation and inflationary expectations if they are higher than expected.
But whatever their position now, the panel sees the rate rising over the next year. Although the consensus for September is still 3.25 per cent, three of the members think it should be 3.5 or 3.75 per cent. Three are at 3.25 per cent and three at three per cent.
In six to 12 months, the consensus is 3.5 per cent, with a range from 2.75 to 4.25.
The panel was set up to provide an independent assessment of the bank's efforts to control inflation.
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