The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada maintain its target for the key overnight interest rate at 4.50% when it makes its next announcement on September 5.

Eight of the nine members attending the meeting supported the call for an unchanged rate at the upcoming setting, while one favoured an increase to 4.75%. “Looking further ahead, the predominant sense among the group was that the overnight rate should again remain unchanged in October, but that it should probably rise in 6-12 months’ time,” the MPC said in a release.

According to the MPC, the key points of uncertainty in the discussion centred on the problems in the market for asset-backed commercial paper — in particular, the extent to which it would affect the price and availability of credit to households and businesses globally, and the extent to which the Canadian economy itself was exposed to these effects.

“Those members inclined to a more pessimistic view of the impact of these problems tended to stress: the negative impact of the bursting U.S. housing bubble on consumer demand south of the border; a sharply reduced appetite for risk among potential lenders; and the difficulties potential borrowers are experiencing, or will experience, in accessing alternative forms of financing,” the MPC said.

Members inclined to a more optimistic view tended to see the difficulties in the U.S. housing market as a widely anticipated correction.

The MPC added that a number of its members stressed the need for the Bank of Canada to promote the effective functioning of the commercial paper market in the short term, while underlining its commitment to longer-term inflation control. These members tended to see measures to promote liquidity and to provide verbal reassurance as a key short-term task, even as the Bank deploys its policy rate with a view to the longer term.

The MPC is a panel sponsored by the C.D. Howe Institute to provide an independent assessment of the monetary stance most appropriate for the Bank of Canada as it seeks to achieve its 2% inflation target.