Shortly after taking over as Bank of Canada Governor in the summer of 2020, Tiff Macklem gave a speech to a virtual gathering of central bankers at the U.S. Federal Reserve’s annual Jackson Hole Symposium about the importance of communicating with the public.
Social media provided new channels to reach people, but also encouraged the spread of misinformation, Mr. Macklem told his online audience. Political populism was on the rise, undermining trust in central banks. A “sea change in central bank communications” was needed to build “a deeper relationship between the central bank and its citizens,” he said.
Two years on, the speech has taken on new resonance. The Bank of Canada is racing to shore up its credibility with Canadians in the face of the highest inflation since the 1980s. It’s facing intense criticism from the new Conservative Party leader, Pierre Poilievre, who made sacking Mr. Macklem a key plank of his leadership campaign.
Moreover, communication with the public has moved to the centre of monetary policy. What individuals and businesses believe about future inflation can have a significant impact on where it ends up. That puts a premium on convincing Canadians that the pace of inflation – which stood at an annual rate of 7.6 per cent in July – will return to the bank’s 2-per-cent target.
“We view it as a battle for understanding,” Carolyn Rogers, the bank’s senior deputy governor and No. 2 policy maker, told The Globe and Mail in an interview about the bank’s communications strategy.
The aggressive pace of interest rate hikes – five consecutive moves, which have increased the benchmark policy rate by three percentage points since March – amounts to a shock-and-awe campaign aimed at convincing individuals and financial markets the bank is serious about getting prices under control.
But the bank has also ramped up efforts to reach Canadians directly. It hired a social-media specialist and has expanded its presence on Twitter, publishing short explainers about monetary policy. “#YouAskedUs if we printed cash to finance the federal gov’t. We didn’t,” reads one recent post. “Why raise rates when Canadians are already feeling stretched with their budgets?” reads another.
The bank has begun timing speeches and media appearances so its officials can provide running commentary on inflation data published by Statistics Canada. And it placed an op-ed by Mr. Macklem in the National Post in August – its second newspaper editorial in 12 months.
“The best way to keep Canadians’ expectations on inflation low is to get inflation back to target,” Ms. Rogers said. “But in the meantime, we think that the more Canadians understand what we’re doing, and why we’re doing it, the more trust they’ll build in the Bank of Canada. And that is a useful tool in keeping Canadians’ expectations of inflation anchored on the target.”
The effort comes partly in response to increased public interest. For the better part of three decades, inflation was low and stable enough that people gained little from learning about it. Financial market participants monitored inflation data for hints about the direction of interest rates. But most people could go about their business without thinking much about price stability, a phenomenon economists call “rational inattention.”
Now, with rapid price increases eroding wages and savings, it is no longer rational to ignore inflation. Workers want to make sure their wages keep up with inflation. Businesses and investors want to ensure they’re making decent returns after adjusting for changes in the dollar’s purchasing power. Internet searches about inflation quadrupled in Canada between June, 2021, and June, 2022, when online interest peaked, according to Google Trends.
This intense focus on inflation poses a challenge for central bankers. Their big fear is a wage-price spiral, which can develop when individuals and businesses expect permanently higher inflation, and push wages and prices higher in a mutually reinforcing cycle. This kind of inflationary psychology, which took root in the 1970s and early 1980s, is hard to break once it’s been established.
“The scenario that we’re worried about is that Canadians look at the current rate of inflation, they think it’s here to stay, they start incorporating that thinking into long-term decision making,” Ms. Rogers said in a news conference after the bank’s latest rate hike earlier this month. “Certainly if that starts to occur, it makes inflation much harder to get down. It means monetary policy has to do more, rates have to go higher, to get inflation down.”
The most recent Bank of Canada survey of consumers, conducted in late April and early May, showed a sharp rise in short-term and medium-term inflation expectations. Longer-term expectations about inflation five years out remained in line with the historical average.
Trying to talk down inflation expectations could prove challenging, said Pierre Siklos, an economics professor at Wilfrid Laurier University. The bank has little experience speaking to people about high inflation, and the average Canadian generally has a poor grasp of economics and central banking
“This is brand new. Inflation hasn’t been this high in more than a couple of decades, and the last time this happened [in the 1970s and 1980s], central banks didn’t communicate at all, or hardly at all, and certainly not in the same way,” Prof. Siklos said in an interview.
“So one of the natural reactions for the public is to say, for example, ‘interest rates are going up, that’s probably going to cause inflation,’ as opposed to being a vehicle used to reduce inflation by reducing the demand for goods and services,” he said.
The bank doesn’t have the same problem communicating with financial market participants, who understand macroeconomics and dote on every word that comes out of the central bank. Nonetheless, the bank faces a different set of communications challenges, given how skittish markets are at the moment, said Beata Caranci, chief economist at Toronto Dominion Bank.
In an interview after the Bank of Canada’s latest rate decision, Ms. Caranci pointed to the market response over the summer to perceived signals from U.S. Federal Reserve Chair Jerome Powell that the Fed would slow its pace of rate hikes, and perhaps cut rates next year. This caused bond yields to fall and stocks to surge. Mr. Powell and his colleagues have since poured cold water on this narrative.
“When chair Powell has even a slight amount of balance in his comments, the market rallies, and you end up with a loosening of financial conditions, and it undermines the intent of what you’re doing in terms of tightening,” Ms. Caranci said.
“So the [Bank of Canada’s] communication being hawkish may be serving that purpose. Rhetoric has to be hawkish irrespective of whether they follow up with the actions in a month, two months, three months time. They have to keep those anchored expectations,” she said.
When asked whether the Bank of Canada is being particularly careful to sound hawkish right now, Ms. Rogers responded, “we’re always careful so that we can be consistent and clear.”
Central bankers haven’t always been keen on clarity. Montagu Norman, Bank of England governor from 1920 to 1944, reputedly had a personal motto: “Never explain, never excuse.” Then-U.S. Fed chair Alan Greenspan said in 1987 that since becoming a central banker, he had learned to “mumble with great incoherence.”
The ideal of a central bank shrouded in mystery started giving way in the 1990s, when central banks around the world adopted formal inflation targets. This involved a trade-off for the insular institutions: Central banks would be given increased independence from the government, but they would have to communicate more with financial markets and the public.
Economists now see communication as central to monetary policy. Former Fed chair Ben Bernanke quipped in 2015 that “monetary policy is 98-per-cent talk and only 2-per-cent action.” Still, most of the emphasis has been on communicating with financial markets, not the general public.
Research into how central banks should best talk to the public is relatively new. But there are some clear takeaways from the research, said Luba Petersen, an economics professor at Simon Fraser University.
“If you can make the information that you’re communicating relatable, so people understand why this matters and how it matters, particularly for them, that’s a much more effective way of getting attention from the public, and for them to retain that information,” she said, noting short videos and tweets tend to be particularly effective.
The Bank of Canada has been trying to simplify its public outreach for a number of years, publishing videos and plain-language explainers of monetary policy. Ms. Rogers said the bank’s emphasis on public communication is nothing new. But the current period of high inflation has focused its efforts to communicate clearly and concisely.
“It’s never been more important than it is now,” she said.
As for Mr. Poilievre’s criticism of the Bank of Canada, Ms. Rogers offered a terse response. “We’ll let the Leader of the Opposition do his job. We’ve got a big job to do, and we’re focused on doing it.”