The Bank of Canada should lower its target for the key overnight interest rate to 3.25% next week, the C.D. Howe Institute’s Monetary Policy Council (MPC) recommended today.

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 aims for a 2% inflation target. The institute’s president and CEO, William Robson, chairs the MPC.

At this meeting, there were unusually pronounced differences in views about the appropriate setting for the target rate, the council said. Seven of the 10 members attending the meeting recommended a short-term cut in the target rate, with five urging a target of 3.25% and two urging a target of 3.00. Meanwhile, two wanted to see the Bank hold steady and one urged an increase to 3.75%.

The members that favoured greater monetary easing tended to emphasize lower inflation numbers in Canada, the expected impact of U.S. weakness on Canadian growth, and the threat that continuing stresses in credit markets and the financial sector pose to activity in the real economy. And on the other side, those members that favoured less easing tended to stress supply constraints, indicators of robust domestic demand in Canada and the possibility that an end to, and potential reversal of, the Canadian dollar’s appreciation might boost domestic growth and price pressures.

As well, the MPC said that a prominent theme in the debate was the appropriate response by the central bank to illiquidity and the recent widening of spreads in short-term credit and money markets. Some members felt that these stresses required a more aggressive easing through lower overnight interest rates, while others were more inclined to see supplemental measures by the Bank of Canada to ease temporary illiquidity in these markets as more effective and/or more appropriate.

The overnight rate is a very short-term money-market rate that the central bank targets for monetary policy purposes.

The central bank’s next rate announcement is scheduled for April 22.