The Bank of Canada is defending itself amid questions about its public silence ahead of an interest rate hike last week that caught many analysts by surprise.
BMO chief economist Doug Porter is taking issue with the lack of public remarks by the central bank in the eight weeks before a rate increase that he says caused a fairly violent market reaction.
In a weekly economics report, Porter wrote that while he thought the case for a rate increase was strong, he felt the BoC’s silent summer created a great deal of uncertainty for markets ahead of the decision.
“On some occasions, we will hear from three Fed speakers in a day. We didn’t hear a peep from the [BoC] for eight weeks,” he says in the report.
Porter argues that the rate hike caught many analysts off guard — and he points to one survey that found only six of 33 forecasters had anticipated the increase.
But a BoC spokesperson says market data before the hike showed roughly 50-50 odds of an increase — revealing that a much greater percentage of traders were correctly interpreting the bank’s most recent messaging from early July.
In response to Porter’s criticisms, Jeremy Harrison also says key figures showing surprisingly strong second-quarter growth were released less than a week before the rate announcement, during the bank’s pre-decision blackout period.
He says the communications approach was not unusual because in three of the last four years the bank made no public remarks between the scheduled rate announcements in July and September.
More talking ahead?
The central bank’s objective is to target inflation so that businesses and consumers can better plan, notes Porter.
“Are interest rates and the exchange rate not also crucial contributors to any planning decisions that businesses and households need to make?” he asks. “A good case can be made that a 13% swing in the exchange rate and/or an 80-bp spike in 2-year yields in a four-month period (which we have just seen) is a much bigger deal for business than whether the inflation rate is a few ticks above or below the 2% target.”
Porter isn’t the only economist criticizing the BoC’s communication style. Managing director and chief economist Avery Shenfeld says in a CIBC weekly economics report that imprecise wording in the BoC’s statement caused traders to misinterpret the central bank’s message.
For example, when the BoC said in its statement that “the Canadian dollar has appreciated, also reflecting the relative strength of the Canadian economy,” traders inferred that the loonie’s sharp rise was of no concern to the BoC, and not a barrier to another hike this year.
“No wonder [the loonie] jumped more than a cent after the announcement,” says Shenfeld.
Porter anticipates a pause in further rate hikes to assess the impact of the first two moves, saying BMO is tentative on an increase at the January meeting.
Shenfeld has an outlook on the central bank that Porter is sure to appreciate, should it prove accurate:
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Published at Mon, 11 Sep 2017 13:58:37 -0400