Bank of Canada de­fends it­self for stay­ing silent be­fore in­ter­est rate hike


OTTAWA — 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 sec­ondquar­ter 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 sec­ondquar­ter) 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.

Stephen Poloz

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