For the longest time, the Bank of Canada was the most transparent of the Group of Seven central banks. As an early adopter of inflation targeting, Canada’s central bank was a leader in demystifying the business of monetary policy. While Americans were left judging the course of interest rates by eyeballing the thickness of Alan Greenspan’s briefcase on the day of a policy meeting, Canadians could simply watch the inflation rate.
The Bank of Canada no longer is the G7’s most straightforward central bank. That title now belongs to the Federal Reserve, which over the past year or so has embraced clear communication as a way to stoke the U.S. economy. The Fed adopted an inflation target, started holding quarterly press conferences, and took to describing its policy goals in explicit terms. The Greenspan fog has lifted.
Bank of Canada Governor Mark Carney, a competitive sort, may want to reclaim the transparency mantel.
The surprise in his speech to the Vancouver Island Economic Alliance on Monday was this line: “If we were to lean against emerging imbalances in household debt, we would clearly declare we are doing so and indicate how long we expect it would take for inflation to return to the two per cent target.”
After making the case for how global economic uncertainty is weighing on Canadian economic growth, Mr. Carney’s comment was a gesture to show the Bank of Canada will do its part to restore confidence by being more explicit about its intentions.
That’s important because of this statement: “To the extent that the economic expansion continues and the excess supply in the economy is gradually adsorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the two per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”
The Bank of Canada has ended its policy statements with that line since June, and Tiff Macklem, the senior deputy-governor, repeated it in a speech a couple of weeks ago.
The stickiness of that guidance as the global economy deteriorated over the summer perplexed many on Bay Street and Wall Street. According to Michael Gregory at BMO Nesbitt Burns, the Bank of Canada is the only major central bank that hasn’t eased policy since March, 2011. As the economic outlook continued to deteriorate, economists came assume the Bank of Canada’s inclination to raise interest rates was a subtle attempt to deflate Canada’s household debt bubble.
That assumption no longer holds. Mr. Carney’s comment in Nanaimo suggests the Bank of Canada has no intention to play word games. If the central bank decides it must raise interest rates for the sole purpose of deterring Canadians from taking on more debt, it will say so. This always may have been the case, but it wasn’t clear until Monday.
So what of the policy guidance? The Canadian dollar is trading lower Tuesday in part because traders think the Bank of Canada will pivot away from raising interest rates when it updates its policy next week. Many analysts remarked on the absence of any trace of the language in Mr. Carney’s speech Monday. Some saw its deletion as an omen of what’s to come.
Omens are for the superstitious. It’s possible to make the same judgement by assessing factors that are far more concrete.
The Bank of Canada has said for months that Canada’s economy was getting close to exceeding the level of output that policy makers deem consistent with its inflation target. But the numbers the central bank’s economists plug into their models have changed quite significantly of late. The International Monetary Fund last week cut its forecast for global growth this year to 3.3 per cent, the slowest since 2009, and 2013 is looking little better. The investment intentions of Canadian companies are at their lowest since the end of 2009, according to the Bank of Canada’s third-quarter Business Outlook Survey, which was released Monday. And inflation hasn’t become an issue: Bay Street analysts predict the core rate was 1.4 per cent in September; at the time of its last economic outlook in the summer, the Bank of Canada was predicting an average of 1.9 per cent in the third and fourth quarters.
Canadian policy makers always said any rate increase would be “weighed carefully against domestic and global economic developments.” Developments over the past few months have underwhelmed, suggesting the need to remove stimulus has diminished proportionately. Next week, expect the Bank of Canada will say as much, in as clear a way as possible.