C. D. Howe’s Overnight Moves Need Work

Less than a month ago, the C. D. Howe Institute released Michael Parkin’s paper, “Overnight Moves: The Bank of Canada Should Start to Raise Interest Rates Now.” The next day, its Monetary Policy Council called on the Bank to increase the overnight interest rate.

This call was terrible. The following week, Statistics Canada reported June’s significant drop in inflation – the boogeyman that supposedly warranted a rate hike. Specifically, headline inflation fell to 3.1% (near the top of the Bank’s target range) and core inflation fell to 1.3% (near the bottom of this range).

More importantly, the faltering economic recovery (including a contraction in Canada’s GDP) clearly warrants keeping interest rates as low as possible. Given recent turmoil in global capital markets, the debate is now about cutting interest rates and/or resuming quantitative easing rather than tightening monetary policy.

The European Central Bank is a laughingstock for having raised interest rates last month, worsening the Eurzone crisis. Fortunately, the Bank of Canada disregarded the C. D. Howe Institute’s advice to do the same and kept its overnight rate level last month.

The Institute’s Monetary Policy Council has fairly consistently erred on the hawkish side. In particular, it wrongly recommended higher interest rates than the Bank delivered throughout 2008, as we descended into the Great Recession.

The title of Parkin’s paper seems like a reference to the Bob Seger classic, Night Moves. To quote from that song’s second verse, the C. D. Howe Institute appears to be “workin’ on mysteries without any clues.”