Here’s what Bank of Canada Governor Stephen Poloz wants you to take away from his speech in Whitehorse on June 15: the world is unfolding roughly as the central bank thought it would a month earlier when it published its latest quarterly economic report. That may not strike you as revelatory, and that’s okay. The news in the Yukon was that Poloz decided to devote an entire speech to what amounted to an economic update. Until now, he has stubbornly refused to engage in a “running commentary” on economic indicators between the quarterly outlooks. Poloz is loosening up a little.
The Bank of Canada is a relatively opaque central bank. That is in part because it is allowed to be: the institution gets a fairly easy ride from members of parliament, senators and the press corps. At the same time, Canada’s central bank has installed very few windows that would allow a peek at how interest rates are set. It is one of the few major central banks that doesn’t keep minutes of its policy deliberations. The institution keeps a fairly tight leash on its deputy governors, preferring to let Poloz set the tone.
A preference for secrecy doesn’t mean the Bank of Canada is a poor communicator. Many on Bay Street and Wall Street actually prefer the Canadian central bank’s commitment to talking with one voice, compared to the mixed messages sent by the Fed’s freewheeling policy makers. That’s important. But so is the accountability that comes from transparency. How transparent is an institution such as the Bank of Canada? It’s difficult to know until a group of unelected officials is forced to do some radical things that a critical mass of voters dislike. Just ask the U.S. Federal Reserve, which has been fighting a rearguard attack on its independence for eight years because many Americans were angered to learn that technocrats could wield such awesome power.
Poloz may sense that his institution isn’t as forthcoming as it could be. The Whitehorse “progress report” was the latest in small adjustments to Bank of Canada’s communications policy that is making the institution less a black box. The speeches of the deputies are more than echoes of the governor’s latest remarks. Poloz also is making better use of the press conferences that follow the quarterly economic reports. The governor’s opening statement used to be a rehash of things reporters had already read. Now, Poloz uses the opportunity to give a flavour of the debate that went into the latest interest-rate decision. The statements provide less detail than would an official record of the policy meeting, but they may accomplish the same thing—so long as the governor continues to be forthcoming.
The Whitehorse speech follows this line. When Poloz took over the job three years ago, he felt that financial markets had become too reliant on central banks to tell them where interest rates were headed. So he stopped providing guidance. He told Investors and traders to follow the data, just like the central bank does. Whenever a reporter asked him for a comment on a particular indicator, Poloz would tell him or her to wait for the next quarterly report. He was so determined to break the market’s addiction to forward guidance that he offered almost none at all. The Fed and other central banks now are similarly trying to convince market participants that their policy decisions will be “data dependent.”
Still, it is unrealistic for central banks to pretend they are just another forecaster. They retain an obligation to share their interpretation of the data on a semi-regular basis. Otherwise, it is courting the volatility that the Bank of Canada’s conservative communications strategy seeks to avoid. And if the Federal Reserve Bank of Atlanta is willing to provide a daily estimate of economic growth, then it probably is reasonable to expect an update from the Bank of Canada more often than once a quarter, or every seven weeks if you count the eight scheduled policy statements.
Poloz appears to agree. He framed his White Horse speech around the four main risks to the outlook for inflation that were identified in the latest quarterly report a month ago.
The Bank of Canada had said that it was possible the U.S. economy and Canadian exports could exceed expectations. Those would have been positive surprises. Alas, Poloz reckons he got those projections about right. The other risks were negative. The central bank warned that the weaker oil prices could have an even more dramatic effect on the economy, and that heavily indebted households could stop spending. The later hasn’t happened, perhaps because households are spending about $600 per year less on gasoline, Poloz said. The governor sounded wary about the prospects for the energy industry. Oil prices are higher, but could reverse because much of the increase is the result of supply disruptions. And even if that doesn’t happen, current prices remain too low to encourage new investment in the oil sands. “Market intelligence suggests there is further downside risk to investment at these still-low price levels,” he said. “Accordingly, this remains a potential source of downside risk to our forecast.”
Bottom line: the Bank of Canada remains content that it has done all that it can do to support the economy and it would take a major shock to prompt it to cut interest rates. At the same time, it feels no pressure to raise them either. Some economists may disagree with that assessment. At least they won’t have to wait until the Bank of Canada’s next quarterly economic report on July 13 to know which way policy makers are leaning.
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