The Bank of Canada should hold its target for the overnight interest rate at 0.25% at its next announcement on July 21, the C.D. Howe Institute’s Monetary Policy Council (MPC) recommended Thursday.

The overnight rate should remain at that level until mid-2010, the MPC added.

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.

The group was unanimous in recommending a target of 0.25% at the next setting, and six of the seven members attending the meeting recommended a target of 0.25% at the following setting in September.

When asked to look six to 12 months out, past the horizon over which the Bank of Canada has committed to keep the overnight rate at its current level, two members called for an unchanged target of 0.25%, two called for a target of 0.50%, and three called for 0.75%. One of the members who called for a target of 0.50% in September did so as part of a recommendation for immediate quantitative easing; none of the other members of the group supported quantitative easing.

“Council members generally felt that the financial and economic outlook had continued to improve since the Bank of Canada’s last interest-rate announcement in June,” the MPC sais in a release.

Members also noted survey evidence suggesting that fears of deflation have receded, with inflation expectations more strongly clustered around the Bank of Canada’s 2% target.

The group also noted a number of continuing concerns — near-and longer-term weakness in the United States, the failure of equity markets to sustain earlier gains, and flagging demand for credit.

Some members also noted that a Canadian dollar stronger than trade volumes or prices would justify may slow growth.

IE