Faced with the recent failure of many of its economic models, the Bank of Canada says it is now relying more on anecdotal evidence, including “conversations with real Canadians” and regular meetings with chief executives.
“We are in uncharted territory,” Bank of Canada Governor Stephen Poloz acknowledged in a message contained in the central bank’s 2013 annual report, released Friday.
“The world has clearly changed since the global financial crisis.”
Mr. Poloz said bank economists have been struggling to adapt to a “new reality” since the crisis, making it much tougher to predict where the economy is headed. He acknowledged that the economy has “fallen short of our expectations.”
Mr. Poloz and other top bank officials have acknowledged in recent speeches and statements that the economy has not picked up as rapidly as initially expected, with exports weak and inflation well below its 2-per-cent target.
Earlier this month, deputy Governor John Murray admitted that the economy hasn’t been behaving as the bank’s models suggested it should. Inflation is stubbornly low, exports aren’t bouncing back with global demand and businesses have cash, but aren’t investing. Meanwhile, the housing market seems to defy gravity, even as all the usual warnings signs – including record-high debt levels and prices – are flashing red.
“The macroeconomy has not been unfolding exactly as we had expected,” Mr. Murray said bluntly.
Last October, the central bank dialed back its key forecasts for the Canadian economy, shifting to a neutral stance on future rate changes and dropping its warning about rising interest rates. It was part of what Mr. Poloz characterized in the annual report as a “significant shift in communications” for the bank.
He said monetary policy is becoming more of an exercise in risk management and less about “mechanical engineering” – echoing a phrase he used in a December speech in Montreal.
The bank had expected that exports and business investment would be driving the recovery, rather than consumers and housing. The long-awaited hand-off remains elusive.
Mr. Poloz said the bank is now testing a variety of new models and methodologies to get a better handle on where the economy is headed, and updating its forecasts eight times a year.
“We are working hard to refine those models, but this experience is also leading us to put increased emphasis on anecdotal evidence – real conversations with real Canadians making economic decisions,” Mr. Poloz said.
That includes increasing its use of surveys, meeting with business associations and regular roundtables with business CEOs – to “add colour to our economic analysis,” he explained. Mr. Poloz said he personally conducted CEO roundtables in Toronto, Montreal, Halifax, Calgary and Vancouver.
He said the bank would continue to “establish new principles and practices, as appropriate” for promoting monetary and financial stability. “It is our intention to build on this experience to redefine central banking for the post-crisis era,” he said.
Mr. Poloz described 2013 as a “challenging year” for the bank. Among the reasons, he cited the failure of the economy to “move onto to a more sustainable track,” the June departure of predecessor Mark Carney to the Bank of England and the relocation of the bank’s 1,300 employees during the three-rear renovation of its Ottawa head office.
The good news, according to Mr. Poloz, is that the tempo of economic change is normalizating. “This allowed the bank to transition from firefighting mode to a more contemplative one in the second half of 2013,” he said.