The C.D. Howe Institute’s Monetary Policy Council (MPC) calls for the Bank of Canada to lower its overnight rate to 4.25% on Wednesday, with more reductions to follow.The MPC, co-chaired by William Robson, the institute’s president and CEO provides an independent assessment of the monetary stance consistent with the Bank’s 2% inflation target.All 11 of the MPC members favoured reductions in the overnight rate over time, with debate in the meeting focusing on the speed of reductions in the short term and the appropriate level of the rate in the longer term. Ten of the 11 voted for a target rate of 4.25% in early September, with one voting to leave the target at 4.5% until the following setting in October, by which time the other members favoured a target of 4%.By March of 2025, six members favoured 3.5%, with three lower than that and two above it. By September of 2025, most members favoured a rate close to 3%, although one favoured 3.75%.The support for lower overnight rates reflected MPC members’ confidence that inflation in Canada is trending back to the Bank's target. A key theme in the discussion was the fact that total Consumer Price Index and various “core” and other measures of inflation have declined by more than the overnight rate, which was already high enough, in real terms, to produce a disinflationary output gap. In this regard, members cited the soft housing market, restrained consumer spending, and the rising unemployment rate.The group noted some risks to an early return to 2% inflation, such as a potential rebound in housing as interest rates come down and increases in unit labour costs resulting from rising wages alongside stagnant or falling productivity. However, the consensus was that inflation was falling fast enough to justify substantial cuts in the overnight rate in the near future.Some MPC members cautioned that an immediate cut to 4% risked signaling the market that the Bank was worried about a recession. Others were cautious because of difficulties in interpreting recent numbers, notably with respect to the labour market, because it was not clear how long it would take for reduced immigration to help lower the unemployment rate.When considering the year ahead, many members expressed concerns about the Canadian economy’s growth potential, noting weak productivity, low investment, and external threats – notably US protectionism. Several members said their votes for the overnight rate in September 2025 reflected judgements that slow growth implied a lower neutral overnight rate than what appears in Bank statements.The Bank's current policy is to not buy Government of Canada bonds and let its holdings shrink as the bonds mature. Ten of the 11 members called for the Bank to maintain that schedule between now and its October overnight rate announcement. One member called for the Bank to accelerate that schedule, noting that the Bank should sell its holdings of Real Return Bonds.
