Bank of Canada Governor Stephen Poloz prides himself on his communication skills, relishing every chance to turn economic complexities into the stuff of everyday life.
The overheated housing market is like a tree with a hairline crack that might topple in a storm. A retractable dog leash illustrates the link between the dollar and trade. The aftermath of an asset bubble is like simmering spaghetti sauce.
But something was lost in translation this week as Mr. Poloz and his Bank of Canada colleagues held the bank's key interest rate unchanged at 0.5 per cent for a 10th straight period . The bank delivered a generally downbeat statement and economic forecast that accompanied Wednesday's rate decision – yet the Canadian dollar and yields on government bonds spiked unexpectedly .
The markets fixated on a change in one sentence – that the bank's inflation outlook is now "roughly balanced," rather than "tilted somewhat to the downside," as it judged in its September statement. The grimmer outlook overall would normally suggest downside risks to inflation and a greater chance of future interest rate cuts – conditions that should have driven currency and bond yields lower – but those few words mistakenly signalled to some that the bank had upgraded its inflation view.
But that was nothing compared with the shocker Mr. Poloz delivered at his news conference 75 minutes after the misinterpreted rate statement. He used his opening remarks to tell reporters that he and his top deputies "actively discussed" a possible rate cut in the lead-up to the announcement. The revelation whipsawed the currency and bond markets, and left observers shaking their heads.
"That was intense," said Charles St-Arnaud, a foreign-exchange strategist at Nomura Securities Co. Ltd. in London and former Bank of Canada economist. "We weren't expecting that."
To a lot of people, the rate announcement suggested one thing, and then Mr. Poloz abruptly changed the channel.
"In terms of communications, it was not the best day that the central bank has had," acknowledged Sébastien Lavoie, chief economist at Laurentian Bank Securities.
Under Mr. Poloz, the central bank has overhauled how it communicates what it's doing, including ending the practice of providing an explicit indication of interest rate bias – so-called forward guidance. And financial markets are still struggling to keep up with the Bank of Canada's evolving messaging techniques.
"Most traders have been used to forward guidance," Mr. St-Arnaud explained. "They've been taken by the hand for so long that they've kind of lost their ability to think for themselves. … You need to take a step back and think about it. You can't expect to be spoon-fed."
Ben Homsy, a fixed-income analyst at Vancouver-based Leith Wheeler Investment Counsel Ltd., says what happened Wednesday wasn't a communication snafu, but a belated mea culpa by the bank for its optimism that non-resource exports would lead the recovery. "We need to look at the data and form our own views on the economy, and [determine] what that means for what the central bank is likely to do," he said.
Central bank watchers continue to wrestle with the bank's practice under Mr. Poloz to essentially rewrite every rate-decision announcement from scratch. Other central banks, such as the U.S. Federal Reserve Board, use the previous rate announcement as the template for the new one, changing only a handful of words; market participants can easily focus on the few small changes to determine what is new.
But Mr. Poloz has said he wants to tell "a fresh story" with each announcement, and insists that his communications team begin each rate statement with "a blank page." The result is a more nuanced and informative document; but with so much of the statement changing from announcement to announcement, it makes for harder work to interpret the changes in the message. "Whether the bank likes it or not, every word matters," said Douglas Porter, chief economist at the Bank of Montreal. "People are going to notice anything you change."
An even bigger innovation under Mr. Poloz has been the governor's opening statement for quarterly news conferences when the bank releases its Monetary Policy Report in conjunction with the rate decision, as it did this week.
Before Mr. Poloz, these news conference preambles merely repeated and summarized the contents of the MPR and the rate statement.
But starting in mid-2014, Mr. Poloz expanded the statement to incorporate a discussion of the key issues the bank's Governing Council (Mr. Poloz and his deputy governors) wrestled with in their deliberations.
Unlike most other major central banks, the Bank of Canada does not publish the minutes of its monetary-policy-setting body's meetings.
But the expansion of the news conference opening statement provides a brief summary of those discussions, offering people "insight into which issues were really on the table during deliberations and how those issues influence the decision," explained Jill Vardy, the bank's chief of communications.
Over the past two years, the opening statement has taken on growing importance in delivering key and increasingly candid messages from the bank. But Mr. Poloz raised the bar further with this Wednesday's opening-statement bombshell.
Now, some bank watchers are wondering whether the press conference opening statement may be supplanting the rate announcement as Mr. Poloz's go-to communication vehicle for delivering his strongest messages, an aberration from most other central banks.
"The statement [opening] the press conference has become as important as the formal [rate-decision] statement and the MPR. That's certainly a different approach to what we are used to," BMO's Mr. Porter said.
"It's a very different style than every other central bank we deal with. As analysts, we have to react to them differently."