C. D. Howeâ€™s Overnight Moves Need Work
Less than a month ago, the C. D. Howe Institute released Michael Parkinâ€™s paper, â€œOvernight Moves: The Bank of Canada Should Start to Raise Interest Rates Now.â€ 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 Juneâ€™s significant drop in inflation â€“ the boogeyman that supposedly warranted a rate hike. Specifically, headline inflation fell to 3.1% (near the top of the Bankâ€™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 Canadaâ€™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 Instituteâ€™s advice to do the same and kept its overnight rate level last month.
The Instituteâ€™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 Parkinâ€™s paper seems like a reference to the Bob Seger classic, Night Moves. To quote from that songâ€™s second verse, the C. D. Howe Institute appears to be â€œworkinâ€™ on mysteries without any clues.â€
Oh common those are some of the smartest people in Canada on that committee. A bloody minded focus on price stability is a virtue not a vice. Remind me again what price stability was supposed to deliver? Shame on me, price stability is a good in and of itself and as it turns out, for itself apparently. And even when the real time evidence is slim you still get 3 dissenters in the Fed.
The C.D. Howe is a bit player in this morality play. As I already showed back in the day they were panting to liberate the Canadian banks so they could become like their American cousins. This does mean they have nothing of value to say, just that they lack discretion.