The C.D. Howe Institute's Monetary Policy Council (MPC) recommended Thursday that the BOC cut its overnight interest rate 50 basis points to 2% at its Oct. 21 meeting.

The MPC's recommendation is the median vote of its members. A C.D Howe Institute press release said Thursday that six of the 10 members attending the meeting recommended cutting the rate to 2%, while two recommended a cut to 2.25% and one recommended holding the overnight rate at 2.5%.

The MPC median vote also produced a recommendation that the BOC hold the overnight rate steady at 2% at its policy meeting in December and for the next six to 12 months.

The MPC meets regularly prior to BOC policy meetings and offers its recommendations about how the central bank might best achieve its 2% inflation target.

"The Council's discussion took place against an international and domestic backdrop of severe stress in credit markets and sharp downward revisions in expectations for real growth and inflation," the think-tank's release said, adding MPC members noted in their discussion the global economic slowdown and recent weakness in U.S. economic indicators create "a much less congenial environment for real growth in Canada."

"Falling commodity prices will hurt Canada's terms of trade, and thus take away a key support for domestic income growth. Some members expect Canadian real GDP to fall in 2009, while nominal GDP may show almost no growth. These circumstances led the Council to conclude that more measures to support Canada's financial system and real growth are needed," the C.D. Howe Institute said.

The MPC unanimously endorsed the Canadian federal government moving to guarantee interbank lending despite the relative health of the country's banks because the lack of a guarantee would make them look like less attractive counterparties.

"The Council felt that a lending guarantee would create a more favourable environment for monetary stimulus by the Bank of Canada, and help ensure that movements in the overnight rate exerted their desired effect on interbank, business and consumer lending rates," the release said.

Most MPC members reportedly felt downside risks to the economy justify further easing from the Bank of Canada even after central banks around the world engaged in a co-ordinated key lending rate cut of 50 basis points on Oct. 8.

Some council members argued measures aimed at bolstering confidence are more effective if adopted quickly, while others said the BOC could quickly raise the overnight rate again if "the extent of disinflationary pressure in the Canadian economy proves to be less than expected."

By Sean McKibbon, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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