Silence ahead of rate move puts heat on BoC

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, he said he had no problem with the rate increase itself because the stronger economy had made a solid case for it.

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 sent clear signals the bank had shifted to a rate-hiking path. But for nearly two months before last week’s announcement, the bank went dark.

“What we had here was a failure to communicate — an epic fail,” wrote Porter, who had been predicting the bank would wait until October to raise the rate.

Governor Stephen Poloz’s communications style has been criticized in the past for purportedly not adequately preparing markets for a rate move.

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.

The Bank of Canada released a detailed defence of its communications approach. 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.

Even without public remarks, markets made the link, he 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.