In a split decision, 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 3.75% when it makes its next announcement on March 7.

Four of the seven council members called for a 25 basis-point increase in the overnight rate at the upcoming setting, two argued for a 50 basis-point increase, and one argued for no change.

“Several members advocating an increase stressed their concern that the policy rate is below the level needed to achieve inflation of 2%,” it explained, adding, “Evidence cited in support of that view included: year-over-year CPI and GDP price index readings above 2%; the prevalence of inflation expectations that are higher than the target; robust demand growth in Canada and abroad; and indicators of high capacity utilization in product and labour markets.”

“Concern that the Bank might be “behind the curve” in its efforts to control inflation was strong enough that most members, including those who argued for a 50 basis-point increase at the Bank’s upcoming setting, said they wanted to see a further increase in the overnight rate at the Bank’s next setting in April,” it reported.

The think tank added that those who leaned toward a more accommodative stance at the upcoming setting and/or the next setting in April tended to emphasize three factors. “Some pointed to the many indicators of price pressure that continue to show year-over-year inflation below 2%. Some saw a risk that weakness abroad — particularly in the US housing sector and some overseas markets — would depress Canadian exports through the balance of 2006 and beyond. And several argued that the Canadian dollar has appreciated in recent weeks beyond what fundamental factors would justify, threatening more weakness in sectors that are not benefiting from strong resource prices.”

The recommendation of the MPC is determined as the median of the votes cast by individual members attending the session. 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. William Robson, the Institute’s senior vice president and director of research, chairs the Council.