The C.D. Howe Institute’s Monetary Policy Council (MPC) calls for the Bank of Canada to lower its target for the overnight lending rate to 3.5% at its next announcement on December 11th. The MPC further calls for the Bank to lower the target to 3.25% at the following announcement in January, to 3% by June of 2025, and to 2.75% by December of 2025.The MPC provides an independent assessment of the monetary stance consistent with the Bank of Canada’s 2% inflation target. The Council’s formal recommendation for each announcement is the median vote of members attending the meeting.All ten of the MPC members attending the meeting recommended a lower overnight rate at the next setting. Seven voted for a target rate of 3.50% next week — a 25 basis-point cut from the current target of 3.75% — while the three other members favoured a target of 3.25%, a 50 basis-point cut.Looking ahead to January, six members favoured a target of 3.25, three favoured 3.00, while one member favoured 3.50%. By June of 2025, nine of the 10 members lowered their vote by 25 basis points relative to where they were in January, while the remaining member continued to target 3.50%. The range of recommendations in a year’s time was 2.50% to 3.50%, with five members voting for 2.50%, two for 2.75%, two for 3.00%, and one for 3.50% (see table below)..One area of debate was the impact of a threatened 25% tariff on Canadian exports from the incoming Trump administration. Some members felt that, like with tariffs imposed during the first Trump administration, most of this threat could be neutralised, and the impact on the economy may not be as severe as expected. Other members were more concerned, noting that Trump could use the border security issue to justify proposed 25% across-the-board tariffs.Some members expected such tariffs could cause inflation while others disagreed. Tariffs act like a negative supply shock on the economy, lowering output and raising inflation, and tend to be permanent after taking hold. On the other hand, such tariffs could be a big blow to the demand side of the Canadian economy, which would reduce inflation.Members contrasted some of the good news stories for Canada in the latest revised GDP figures (more consumption and residential construction) with more worrying domestic trends such as poor business investment, weak productivity numbers, and a reduction in GDP per capita in eight of the last nine quarters.Looking elsewhere, members noted how striking the divergence is between the strength of the US economy and those of the rest of the world. It was unclear whether this would benefit Canada as on the one hand our economy is more aligned with that of the US, but on the other, at present, this is leading to much of the uncertainty Canada faces.The MPC’s next vote will take place on January 23, 2025, prior to the Bank of Canada’s overnight rate announcement on January 29.
