BoC should hike rates: C.D. Howe

The Bank of Canada should follow the European example and raise interest rates when Canada's central bank meets next Tuesday, the C.D. Howe Insititute said Thursday.
C.D. Howe Institute wants Bank of Canada governor Mark Carney to hike rates at next meeting. (Chris Bolin/Canadian Press)

The Bank of Canada should follow the European example and raise interest rates when Canada's central bank meets next Tuesday, the C.D. Howe Institute said Thursday.

The Toronto-based economic think-tank said Canada's monetary authority should boost its main borrowing charges by one-quarter of a percentage point to 1.25 per cent in order to defuse gathering inflationary pressures.

The Bank committee, which decides the country's interest rate policy, is slated to meet on April 12. 

Close call

The C.D. Howe's 12-member monetary policy committee split 7-to-5 in favour of a Canadian rate hike at that meeting.

"On balance, members felt that the disinflationary output gap in Canada was small and closing, and several stressed the possibility that the global economy is increasingly supply-constrained, implying continued strength in commodity prices and general inflationary pressure," the Institute said in a press release.

In more common parlance, the committee believes that Canada's economy is reaching its pre-recession potential and could court higher prices if gross domestic product (GDP) raises much faster.

Meanwhile, as other countries recover, they will drive up world commodity prices, which in turn will hike inflation in Canada.

Boosting interest rates increases the cost of borrowing and tends to dampen down economic growth.

In addition, the 12 economists who make up the C.D. Howe's committee argue that the Bank should keep boosting borrowing rates at regular intervals. Within a year, the Bank rate should be at least two per cent and as much as 3.5 per cent, according to these experts.

The country's central bank last raised interest rates in September 2010.

Follow the leader?

If the central bank accepts the Institute's advice, it will be following the European Central Bank, which boosted its main borrowing rate by 25 basis points on Thursday to 1.25 per cent.

By contrast, the Bank of England decided not to increase that country's interest rates despite an inflation rate approaching five per cent.

Canada's inflation rate for February stood at 2.2 per cent.