James Hymas is president of Hymas Investment Management.
Central banks have become a new target of political attacks. Donald Trump demanded the “boneheads” at the U.S. Federal Reserve lower interest rates to zero or less, Turkish President Recep Tayyip Erdogan dismissed central-bank officials who opposed his monetary policy, and Conservative Leader Pierre Poilievre promised to fire the head of the Bank of Canada, in order to “replace him with a new governor who would reinstate our low-inflation mandate, protect the purchasing power of our dollar, and honour the working people who earned those dollars.”
In such an environment, public confidence in monetary policy is more important than ever. Businesses, their employees, their investors and their customers all need some assurance that financial conditions will not change drastically overnight at the caprice of a politician. To build that trust, decision-makers must be transparent about the rationales underlying their decisions; this will also defend the banks’ independence.
The Bank of Canada’s inaugural release of its policy minutes on Wednesday is a step in the right direction, but the bank has also made too many major communications missteps that have damaged public confidence.
One was the infamous Twitter thread that addressed claims that the bank was “printing money” by stating baldly that “#YouAskedUs if we printed cash to finance the federal gov’t. We didn’t,” in an apparent response to Mr. Poilievre’s charge that “printing money to pay for excessive government spending has caused today’s inflation.”
Arguing that quantitative easing (QE) is not the same as “printing cash” is, at best, quibbling about semantics; the bank itself states that “Settlement balances (or reserves) [created as part of QE] are a unique type of money that the central bank creates.” It is the explicit purpose of QE to increase inflation. The bank should have better explained how, sometimes, that is necessary. Pettifogging has damaged the bank’s credibility; it must instead address the issues in a forthright fashion when communicating with the public.
Communication failures have also marked the Department of Finance’s recent cancellation of the Real Return Bond program, which the bank manages. The cancellation has caused widespread anger, with members of the Canadian Fixed-Income Forum, an advisory group, whining that “inflation indexed-linked bonds are a very important asset class that serves a crucial role in allowing Canadian investors to manage their exposure to inflation.” The critics have forgotten that the purpose of the government’s debt management strategy is not to create interesting investments, but to “raise stable and low-cost funding to meet the financial requirements of the Government of Canada” – yet the bank has not reminded them.
While responsibility for the decision to cancel the program rests with the Department of Finance, the bank is Canada’s premier source of bond market analysis and has been deeply engaged on this file. It had been involved in conducting a 2019 consultation on the program and has keen insight on the weaknesses of it: The liquidity of the market is poor, which suggests greater expenses for real-return bonds than for nominal bonds.
Especially in such a politicized climate for central banks, the bank could have used the cancellation as an opportunity to communicate clearly and transparently about its work, cultivating public confidence in institutions like it.
But the bank has not; the debate around the cancellation is devoid of facts and the bank has lost credibility as a result. Regular publicly available analyses by the bank would have also sidestepped the complaint that the investment industry did not have “sufficient warning to plan for the change in RRB issuance.”
Transparency is also inadequate when announcing policy rate decisions. A recent staff discussion paper compared the bank’s disclosures with those of eight other major central banks. Of particular interest are the voting records (reporting on how committee members voted on the policy), and the diversity of views (reporting on which issues were considered important by a minority of members). The Bank of Canada was among five central banks that did not disclose voting records at all, and one of only three that provided no information regarding diversity of views.
This secrecy must end, together with the policy that decisions be reached via absolute consensus. Predictions are inherently uncertain and reporting of policy rate decisions needs to reflect this. Competent, confident members of the bank’s governing council will be pleased to occasionally accept minority status when they feel that an important point must be made; indeed, a recent article from the International Monetary Fund advocates that policy rate decisions should take a form similar to judicial decisions, with full space given to dissenting views.
This information will be of great value to investors as they form their own views and the resultant market information will in turn inform the bank’s decision-makers. Investors currently place undue confidence in central-bank pronouncements, leading to an echo-chamber effect in which the only feedback the bank receives from the market is a reflection of their most recent prediction.
Wednesday’s release of the bank’s summary of deliberations report should be the first step in having such disclosures on other fronts, too. Better reporting and honest, pro-active communication with the public are no panacea and will not suddenly make the process of financial management – even on the smallest scale – any easier. But improved communication about specific risks inherent in each market forecast and policy prescription will allow us all to chart a better course through the uncertainty.