The C.D. Howe Institute’s Monetary Policy Council is calling on the Bank of Canada to raise its target for the key overnight interest rate to 4.5% when it makes its next announcement on May 29.

A majority of MPC members supported an upward move in the Bank of Canada’s policy rate in the near future. One of the nine members attending this meeting called for a move to 4.75% at the upcoming setting and five called for a move to 4.5%, while three members called for no change.

Looking ahead to the July setting, one member called for a move to 5%, two called for a move to 4.75%, four called for a move to 4.5%, and two called for no change.

Finally, MPC members were asked for their views about the Bank’s overnight-rate setting in six to 12 months’ time. The median call was 5%.

The recommendation of the MPC is the median of the votes cast by individual members attending the session.

The think tank reports that the dominant theme in the group’s discussion was the continued inflationary pressure in a Canadian economy operating above its productive capacity. “Contrary to expectations, including those expressed in the Bank of Canada’s April Monetary Policy Report, that subdued growth in early 2007 would bring production more in line with capacity, most indicators of spending and output in Canada have showed continued buoyancy,” it noted. “Both headline and core inflation are running ahead of the Bank’s target, growth in the monetary aggregates suggests that inflation will continue to run above target, and the policy rate is low in real terms.”

“Notwithstanding signs that inflation expectations remain contained, as well as the subdued performance of some measures of wage increases, and the possibility that the recent strong appreciation of the Canadian dollar will dampen demand and price pressures, recent higher-than-expected indicators of both real activity and prices inclined most MPC members to advocate a higher policy rate immediately, and to expect continued increases in the policy rate over the next six to 12 months,” it added.

The institute also reported that the group was divided in its assessment of the outlook for U.S. growth through the remainder of the year, with contradictory readings from the U.S. housing market being a particularly perplexing point.

It also said that assessing the state of the Canadian labour market is a challenge. “Strong labour-force growth and subdued wage increases suggest less pressure on productive capacity on that front, but several members highlighted the growth of other forms of compensation, and pointed out that weak labour productivity growth means that unit labour costs are rising faster than headline wage measures would suggest,” it said.

“The strength of the currency and its potential reaction to an upward move in the policy rate was also a point of debate, with several members highlighting the importance — in the event of a rate hike — of the Bank’s signals about potential further moves in determining whether the currency would likely appreciate further,” it reported.