For the past decade, traders have been conditioned to expect central banks to both telegraph policy tweaks ahead of time and offer a thorough rationalization of those shifts at the time of implementation.
Canada’s central bank provided neither when hiking its benchmark rate to 1 per cent on September 6. Monetary policy makers hadn’t spoken publicly since July 12, when they delivered their first increase in almost seven years, nor was the latest decision followed by a press conference.
The data – which showed the Canadian economy expanded at a torrid pace of 4.5 per cent in the second quarter, with core inflation measures beginning to edge higher – spoke loudly enough.
It’s a throwback to the way central bankers used to operate in the 1980s and 1990s, when policy shifts could be made on any business day, without warning. The Bank of Canada didn’t adopt fixed announcement dates until the new millennium.
“It’s bringing monetary policy back to what it was 20 years ago – no bells and whistles, just a decision and a statement,” McGill University associate professor of economics and former BoC special adviser Christopher Ragan told Bloomberg.
Even as central bankers across advanced economies tiptoe toward tightening policy, only Governor Stephen Poloz, who joined the Bank of Canada in 1981 before moving to the private sector 14 years later, seems to be willing to let the data speak for itself. By way of contrast, ahead of last week’s meeting, the European Central Bank chose to pre-announce a decision not to clarify plans for the future path of its quantitative easing program until its following decision in October.
“This is a reminder that Stephen Poloz is not Mark Carney, and this is not the financial crisis," said Brian DePratto, senior economist at Toronto-Dominion Bank, referring to Poloz’s predecessor and now Bank of England governor. “It’s safe to say that the absence of a forward guidance, hand-holding type of approach stands out relative to its peers in other advanced economies."
Poloz’s preference to avoid steering market participants to predetermined outcomes ahead of meetings has been evident throughout his tenure atop the central bank.
“He genuinely prefers central banks to not provide forward guidance and for markets not to expect moves only at Monetary Policy Reports,” said Frances Donald, senior economist at Manulife Asset Management Ltd.
In a 2014 discussion paper announcing the end of formal forward guidance by the Bank, Poloz outlined the benefits of moving away from such an approach “in normal times,” echoing a 2010 argument advanced by former Deputy Governor David Longworth.
“Offering instead full transparency on the risks that the central bank is weighing causes the market to assess new information more or less as the central bank does; and because every data point can give rise to a debate between economists, the market remains two-way and less vulnerable to unusual leveraging and volatile shifts in sentiment,” he wrote.
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