Fast Rate Hikes Recommended

C.D. Howe put out this paper last week urging the Bank of Canada (BoC) to raise rates aggressively once its rate hike moratorium ends on June 30.

The report stated:

• “The Bank (of Canada) should keep its conditional commitment, but should thereafter raise the overnight rate sharply by 50 basis points at every announcement date (after June 2010) until mid-2011.”
• If inflation continues to rise, the BoC should be prepared to hike rates proportionately more. (This assertive policy style is based on the “Taylor Principle”--(after U.S. economist, John B. Taylor).
• Heading off inflation will necessitate “aggressive” rate increases (50 basis points per BoC meeting), starting this summer.

Whether the BoC heeds this advice is another matter. 

The Bank’s next interest rate meeting is tomorrow.  Virtually every major economist expects no near-term change in Canada’s key lending rate.

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About The C.D. Howe Institute:  C.D. Howe is a national, nonprofit organization that “aims to improve Canadians' standard of living by fostering sound economic and social policy.” The Institute promotes the application of independent research to major economic and social issues, by leading experts.