C.D. Howe Institute monetary policy council urges Bank of Canada to raise rates

OTTAWA - The C.D. Howe Institute's monetary policy council recommended Thursday the Bank of Canada raise its target for the overnight interest rate. The group of economists recommended the central bank raise the key rate by a quarter point to 1.25 per cent at its rate announcement next week. Bank of Canada governor Mark Carney is expected to keep rates on hold at one per cent when the announcement is made July 19.

"The principal theme of the group’s discussion was the contrast between the Canadian domestic scene, which most attendees felt justified a more restrictive stance by the Bank," the think tank council said in a statement.

However, the recommendation by the mix of private sector economists and academics was not unanimous. Five members of the panel recommended the increase, while four others suggested the Bank of Canada keep the rate at one per cent.

The bank last hiked interest rates in September 2010.

"Looking abroad, participants generally agreed that the potential negative impact on global growth and on financial conditions in Canada and elsewhere of sovereign debt defaults was enormous, but they differed in their views about how the Bank of Canada should respond to this prospect," the council said.

"Some argued for more accommodative policy on the grounds that inflation expectations are well anchored and the Bank should support domestic demand. Others stressed the risks of postponing needed tightening for too long in preparation for events that might not occur. "

The group was unanimous though in their recommendation that the rate, which is at an exceptionally low level, needs to rise over the coming year.

The central bank will make its decision next week as the U.S. and global economy present an uncertain future. Even as the Canadian economy appears on track, weakness in the U.S. and threats of sovereign debt defaults threaten the outlook.

Speaking to a Senate committee last month, Carney warned that the U.S. economy is a shadow of its former self and a mountain of debt weighing on the balance sheets of advanced countries around the world will dampen growth for years.

Carney told the committee that the second quarter in Canada could see growth drop all the way to the one per cent range, from 3.9 per cent in the first three months.