If you thought economists were wrong a lot before, just wait.
After a year of making it easy by telling the market exactly what the Bank of Canada would do with borrowing costs by giving a commitment to keep them at emergency lows, Governor Mark Carney has rapidly switched tacks. The country's top central banker is now confounding those who would try to predict exactly how fast interest rates will rise by refusing to give explicit guidance.
Yesterday's quarter-point increase in the benchmark central bank rate and the accompanying statement show that the kind of transparency markets get from Mr. Carney as borrowing costs go up in coming months is going to be very different than what they have become used to over the first part of his tenure, when rates dropped to record lows and stayed there.
In this statement, Mr. Carney is being open but not predictable. He is laying out the parameters he is watching and leaving it to markets to try to figure out what that will mean for rates. It's an education for investors and analysts, because this is the first time they have seen Mr. Carney raising borrowing costs.
"It's going to be more fun being the central banker in this environment than being a forecaster," said Mark Chandler, a rates strategist at RBC Dominion Securities who predicts "a whole bunch of angst" before every Bank of Canada rate announcement in coming months.
Just as the explicit commitment to keep rates low served a purpose by giving an uncertain economy some certainty, the new move to the other end of the predictability spectrum gives Mr. Carney the flexibility he needs to deal with a stop-and-go rebound in growth.
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The economy posts a couple of hot quarters and inflation ticks up? Fine, a quarter point tighter it is. But then we wait and see.
This isn't a normal recovery, so there's no sign of the central bank's normal language in a tightening cycle. Usually, there is wording foreshadowing a steady move higher, along the lines of "some further reduction of monetary stimulus will be required," to quote a 2005 rate hike announcement. This time, the guidance is that "any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments."
With that, Mr. Carney has established himself as neither hawk nor dove, just a pragmatist who watches the data and the markets and reacts.
Already, there are signs that the new strategy is a success. The market is re-evaluating its belief that more rate cuts are a sure thing.
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An Investor's Guide to Understanding the Economy by Gary Rabbior:
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Normally, one rate cut begets immediate speculation of another, which led influential economist David Rosenberg of Gluskin Sheff to warn the Bank of Canada against even starting to increase borrowing costs. Mr. Rosenberg has compared it to eating potato chips, because "you can't stop at just one." Mr. Carney is signalling that he believes he can stop, and the market is taking him at his word.
His go-slow stance places him at odds with commentators at places like the Organization for Economic Co-operation and Development and the C.D. Howe Institute's monetary panel, which call for Mr. Carney to get borrowing costs moving steadily higher.
The OECD recommends gradual rate increases through 2011.
The C.D. Howe council of 11 of the country's top economists is more aggressive, arguing that borrowing costs should rise at a pace that implies a quarter-point move at each of the bank's regular announcement dates remaining this year, and another full percentage point of increases by May of next year. The only debate at the panel's most recent meeting was between those who wanted to move quickly and those who wanted to move really quickly.
Mr. Carney's message when it comes to such calls seems clear: Don't try to stand here in June and predict where rates will or should be in December, or the middle of 2011, when every day the economic picture changes. It's all about the data, and the Bank of Canada will make the calls as the real-time signals on the health of the global economy roll in.
That's going to mean a lot more volatility for everyone, from pro traders who make bets on interest rate futures to business people who deal across borders and need to buy and sell foreign currency.
Going into Tuesday's move, the market was split on whether there would be an increase, and expectations were bouncing around each day. In that environment, the dollar is jittery and so are bond markets. That makes some people money, and costs others.
In this world, where guidance could paint the Bank of Canada into a corner, those costs are a tradeoff Mr. Carney is clearly willing to make.