Bank of Canada gets into a spat about communication

Author: Adam Button | Category: Central Banks

Bank of Canada fights back


The Bank of Canada doesn't like the criticism it's received after hiking rates last week. The gripe is that they poorly communicated to markets.

In fact, they didn't communicate to markets at all. There wasn't a single effort to communicate anything after the prior BOC statement.

Doug Porter at BMO took the central bank to task.

"Ahead of every FOMC meeting, we are asked to grade the Fed's communications policy since the prior meeting," Porter said.

"On the Bank of Canada, many would be tempted to give them an F in this case," he added.

"We think that harsh judgement is wrong - we would give them a zero. As in, there was no communication since the last meeting. Zilch. Zip. Nada. Nothing."

The BOC wasn't pleased and released this statement, which is (ironically) longer than the BOC statement:

"Although Mr. Porter indicates that only 6 of 33 forecasters anticipated the Bank's rate increase this week, market data indicated roughly 50-50 odds of an increase prior to the announcement. Evidently, a much higher percentage of trading desks were correctly interpreting the Bank's prior messaging that monetary policy would be forward-looking and data dependent, not predetermined. Markets took on board the string of positive surprises in the economic data, especially the Q2."

 "The Bank does not usually make public remarks during the late summer period between the July MPR and the early September Fixed Announcement Date. This has been the case three out of the past four years."

"The Bank reiterated in July its forward-looking, data-dependent stance for future monetary policy decisions. Indeed, in the Governor's July MPR opening statement, he said 'monetary
 policy is not on a predetermined path. It will remain highly data-dependent as we move forward' and 'Future adjustments to the target for the overnight rate will be guided by incoming
 data as they inform the Bank's inflation outlook.'"

 In that opening statement, he provided a number of points of context for the Bank's July decision, and future decisions, including:

  •  that the economy was absorbing excess capacity more rapidly
     than projected.
  • that as output growth continues to exceed potential,
     additional capacity could be created (potential output could
     expand).
  • that the appropriate setting for interest rates when economic
     growth is rapid, but inflation is low is an important issue. The
     Bank examined this issue from two perspectives: special factors
     temporarily pushing inflation lower, and lags between monetary
     policy actions and their ultimate effects on inflation.
  • that future adjustments to the target for the overnight rate
     must be sensitive to continued uncertainty and financial system
     vulnerabilities.

All of these issues remained relevant between the July and September decisions and were referenced in the September statement.

With respect to inflation specifically, both the July MPR and the Governor's opening statement clearly explained our assessment that inflation was below target in large part because
 of temporary factors, as well as some drag from past excess capacity. In the context of the Bank being forward-looking, the inflation data since the July MPR came out as expected, with a
 slight uptick in both total and core measures.

The most significant piece of incoming data between the July and September decisions - Q2 GDP - was published on 31 August, inside the Bank's pre-decision blackout period. This is a week-long period during which Governing Council members refrain from giving speeches and from speaking to the news media or other outside parties about the economic outlook and the direction of monetary policy, or about anything else that could be considered relevant to the economic outlook and their interest rate decision. The significance of Q2 annualized growth rate of 4.5%, much stronger than the Bank's July projected estimate of 3.0%, appeared clear to financial markets, with expectations for a September rate rise increasing in the days after its publication, and prior to the Bank's September 6th decision."

I don't think this is the right response. You don't want to get in a war of words over something like this. The best you can do is sympathize the market and say the BOC had no other choice because of GDP and the communication blackout. You can even say something about studying how to communicate better.

Finally, saying it was 'roughly 50-50' is shady. It was 41.2% for a hike in the hours before the decision.