The Bank of Canada is defending itself amid questions about its public silence ahead of an interest-rate increase last week that caught many analysts by surprise.
The response came after BMO chief economist Doug Porter took issue with the central bank’s lack of public remarks in the eight weeks before the rate increase.
In a note to clients, Porter said he had no problem with the rate increase itself because the stronger economy had made a solid case for it.
But he blamed the information vacuum for causing a “great deal of uncertainty” and a “fairly violent market reaction.”
Canadians hadn’t heard a peep from the central bank since it raised the rate July 12 for the first time in nearly seven years, Porter wrote in Friday’s note.
Ahead of the July increase, senior officials including governor Stephen Poloz sent clear signals the bank had shifted to a rate-hiking path.
However, for nearly two months before last week’s announcement, the bank went dark.
“There was no communication since the last meeting. Zilch. Zip. Nada. Nothing,” wrote Porter, who had been predicting the bank would wait until October to raise the rate.
“What we had here was a failure to communicate — an epic fail.”
Poloz’s communications style has come under fire in the past from those who felt he hadn’t adequately prepared markets for a rate move. Economists point to his January 2015 rate cut, which caught markets off guard.
Last week’s hike also came as a surprise, Porter argued, pointing to one survey that found only six of 33 forecasters had anticipated the increase.
In response to Porter’s criticisms, the Bank of Canada released a detailed defence of its communications approach.
Bank of Canada spokesman Jeremy Harrison said in a statement that market data before the hike showed the odds of a hike were about 50-50.
That, he said, indicated that a much larger percentage of traders had correctly made sense of the bank’s most recent messaging in July, which said future decisions would be guided by economic data.
Harrison also noted that surprisingly robust numbers for second-quarter growth were released less than a week before this month’s rate announcement — during the bank’s pre-decision blackout period. The bank has a policy of avoiding any external communications about the economic outlook and monetary policy in the week before rate decisions are announced.
Even without public remarks, markets made the link, Harrison argued.
“The significance of (the second-quarter) annualized growth rate of 4.5 per cent, much stronger than the bank’s July projected estimate of three per cent, appeared clear to financial markets, with expectations for a September rate rise increasing in the days after its publication,” he said.
The bank’s summertime communications approach was not unusual, he added, because in three of the last four years it didn’t make any public remarks between the scheduled rate announcements in July and September.
Krishen Rangasamy, a senior economist at National Bank, said despite the impressive growth numbers his shop was among those predicting the central bank would hold off until October in order to telegraph the move for markets.
“We thought in light of the amount of criticism the Bank of Canada has had in the past, they would probably have learned from this and basically prepared markets for a rate hike,” said Rangasamy, who noted the dollar surged after last week’s unexpected announcement.
Rangasamy agreed that the economic data supported the bank’s rate-hiking decision, but he thinks the bank’s communications strategy could use some work.
“I don’t think anybody will forget about the rate cut that was delivered … January (2015) — that came out of the blue,” he said. “And since then the Bank of Canada had been under criticism for the way they communicate.”
A few weeks before the July rate hike, Poloz made public comments that two 2015 cuts he introduced as insurance following the collapse in oil prices had done their job. He was widely expected to raise the rate again to essentially reverse the bank’s other 2015 reduction.
Ian Lee, an economics professor at Carleton University, said the fact market expectations of a rate hike last week were about 50-50 suggests the bank could have offered more information to help keep traders from going down the wrong road.
“You would think that it should be higher than a flip of the coin in terms of the anticipation of where the bank is going,” Lee said.
Porter, meanwhile, said he believes there have been profound implications from the bank’s progressive shift in tone. He suggested the steep climb in the value of the Canadian dollar since the spring has been related to the bank’s tone swing from that of an institution on the verge of another rate cut as recently as early 2017 to that of “the most aggressive hiker in the world.”
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