The C.D. Howe Institute’s Monetary Policy Council recommends that the Bank of Canada raise its target for the key overnight interest rate to 4.5% when it makes its next announcement on July 10.

The call for a higher overnight-rate target was unanimous: all 10 of the members attending the meeting supported the move to 4.5%.

Looking ahead to the September setting, three members called for the rate to stay at 4.50%, while seven members called for a further increase to 4.75%.

The main focus of the Council’s discussion was the continued pressure of strong demand, both at home and abroad, on productive capacity in Canada, and the resulting pressure on inflation, the think tank reported. “Most members saw domestic demand as robust, and several remarked on the improving prospects for growth abroad — including in the United States, where distress in the housing sector may have played out,” it said. “Turning to the economy’s supply side, labour-market constraints, disappointing productivity growth, and indicators that businesses were struggling to meet demand all figured in the conversation.”

It reported that the factors that led the group to favour an increase in the policy rate included: an acceleration in unit labour costs; rapid increases in service-sector prices; and the prospect that higher headline inflation numbers once the effect of the July-2006 GST cut drops out of the year-over-year measure will exacerbate inflation expectations.

While the Council agreed on the need for near-term increases in the overnight rate, views of the appropriate course for the overnight-rate target over a six-12 month horizon were mixed, with some members recommending holding the rate steady at 4.5%, and others wanting to see it go as high as 5.25%. The median call was 5.00%.

Two major points of uncertainty tended to divide the group, it said: the impact of the rising dollar, and the performance of the Canadian labour market and its implications for potential growth.