Central bank’s messaging under scrutiny


OTTAWA – The central bank governor’s communications style is under a microscope — but the jury is still out on whether he needs to change his strategy.

Experts shared a range of views Thursday at a Bank of Canada conference about governor Stephen Poloz’s messaging ahead of his interest-rate decisions, which included a hike last week that caught some analysts by surprise.

The rate decision attracted open criticism from forecasters over the fact the bank didn’t offer more-explicit signals about its intentions beforehand.

Others, however, have dismissed the concerns. They’ve argued that stronger-than-expected economic numbers released before the rate increase provided more than enough information to persuade markets that, despite the bank’s silence, a hike was on the way.

The debate over central bank communications emerged as a central theme at the Bank of Canada headquarters, where dozens of the country’s top economic experts gathered for a conference on monetary policy.

Attendees offered different opinions as well as some advice on the issue.

Some suggested the bank offer a consistent level of public transparency when it comes to its expected interest-rate path, while others recommended senior officials spend more time updating the public.

But those perspectives were countered by experts who insist there’s no need for the bank to give more signals to markets, which economists often refer to as “forward guidance.”

The issue made headlines in recent days after BMO chief economist Doug Porter wrote a paper to clients calling the central bank’s pre-decision communications an “epic” failure.

Porter said he had no problem with the rate hike itself, because the stronger economy had made a solid case for it.

But he argued the bank caused significant uncertainty and a “fairly violent” market reaction by not making any public remarks for about two months before the rate increase.

In contrast, critics have also noted that, ahead of the bank’s July rate increase, Poloz sent clear signals he had shifted to a rate-hiking path.

Porter’s criticism caught the central bank’s attention, which responded with a detailed defence.

The bank argued that a large percentage of traders had correctly read Poloz’s most-recent messaging in July, which had indicated future rate decisions would be guided by economic data. Market expectations in the days before the announcement showed the odds of a hike were about 50-50, bank spokesman Jeremy Harrison said.

Harrison also pointed to the unexpectedly strong numbers for second-quarter growth released less than a week before the rate announcement — during the bank’s pre-decision blackout period. The bank has a policy of avoiding any external communications about the economic outlook and monetary policy in the week before rate decisions are announced.

With so much attention paid to the issue in recent days, it became an unofficial theme of a conference on the renewal of the bank’s inflation-targeting commitment in 2021. The issue popped up on stage during panel discussions and on the sidelines of the event.

After the conference, senior deputy governor Carolyn Wilkins said she’d like to study transparency and communications suggestions that could add clarity that’s useful for credibility, anchoring expectations and avoiding unproductive volatility.

“My hope is that there’s some way to interact that makes it easier for people to understand how we think about the economy, what information is important to us and how that might be evolving,” Wilkins told reporters.

“My hope is that we will continue to improve that. My assessment is that, in general, it’s OK. It’s pretty good.”

Wilkins said if the bank decides to increase the number of speeches and news conferences, those changes could be implemented soon.

During one session, panellist Michelle Alexopoulos, a University of Toronto economist, said the debate over how the bank communicated — or did not communicate — its thoughts before the July and September hikes suggests that forward guidance should become a regular tool to ensure consistency.

“If we don’t want to give it all the time, that’s fine, but we should give some guidance as to when we’re going to use the guidance so that we’re not actually caught in some situations where individuals are guessing,” Alexopoulos told the audience, which included Poloz himself.

She suggested the bank introduce a form of “conditional” forward guidance to leave it some wiggle room in case of sudden economic changes.

But others said Poloz doesn’t need to adjust his communications.

Don Drummond, a Queen’s University professor, said he didn’t think the recent rate hike hinged on the strong growth number released just days before the decision.

The economy, he added, had been showing strength for a while.

“I think the onus is on everybody else — why wouldn’t they raise interest rates?” said Drummond, who sat beside Poloz in the audience at conference.

“I would have been shocked if they had not gone ahead and taken that as an opportunity to raise interest rates. So, I think there’s some misunderstanding about how monetary policy is geared.”

Drummond, a former senior official with the federal Finance Department, also said there’s an incorrect notion out there that monetary policy is a precise science.

Poloz did not address the conference, which included many international experts.

About three years ago, Poloz announced the bank would move away from forward guidance, which was adopted by the bank in the wake of the financial crisis.

At the time, he said forward guidance reduced uncertainty for markets about the path of interest rates when they were already at a very low level.

However, Poloz noted guidance could also create significant volatility when markets perceived the bank was preparing to change its position.