Bank defends its silence 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 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 past four years it didn’t make any public remarks between the scheduled rate announcements in July and September.
Krishen Rangasamy, senior economist at National Bank, agreed the economic data supported the bank’s rate-hiking decision, but he thinks the bank’s communications strategy could use some work.