The BoC’s communication approach isn’t effective.
The Bank has failed to gain investors’ confidence since ending its regular use of forward guidance in October 2014. Statements this year have swung between concern and optimism over the state of our economy. And, Governor Stephen Poloz himself has made mistakes: he called first-quarter growth “atrocious” during a March 2015 interview with the Financial Times—shortly after stating in a rate announcement that we were entering a growth period.
Messaging from an entity that holds public trust should be more careful.
Tom O’Gorman, Franklin Bissett Investment Management’s director of fixed income, agrees, chiding the central bank for its unexpected January rate cut.
“Rule number one is you never surprise the market,” he says.
Despite investors’ uncertainty, Poloz maintains that forward guidance is best kept in reserve so it has greater impact. And, he has also hinted that surprising markets helps the BoC fulfill its inflation mandate and influence the loonie, thus stimulating manufacturing.
Problem is, this approach puts people on edge. That flies in the face of the Bank’s mandate, which includes creating stability and, as O’Gorman puts it, “letting markets function [without being] a participant.”
The BoC is falling short on that mandate. In the aftermath of oil price shocks, investors are craving leadership, yet the Bank has continued to reduce investors’ reliance on forward-looking statements. Poloz claims such guidance alters people’s return expectations and portfolio decisions, diminishing market efficiency.
This is the wrong time to reinvent central banking.
Poloz hasn’t yet earned the respect of investors, never mind the authority to shake up perceptions of what central bankers are supposed to be accomplishing.
Instead, O’Gorman says, “The head of the BoC should project confidence.”
To be fair, Poloz has a tough job. The Bank of Canada is often compared to the U.S. Federal Reserve, which is highly transparent and less political, and, by mandate, overly cautious. Still, the BoC can learn two things from the Fed: how to offer consistent messaging, and how to observe and allow economic trends to develop before acting. Hasty action scares markets, and the Fed’s consistent policy announcements allow markets to price in bad news well in advance of rate-setting days.
Poloz wants investors to read markets independently, but they can’t unless they know what the BoC bases rate movements on. If he won’t offer regular forward guidance, he should at least point investors toward the right economic indicators.
Analyzing central bank statements
The Fed’s statements:
- are uniform;
- mainly use moderate phrases (e.g., “slow,” “declined,” “softened,” “decreased”);
- refer to long-, mid- and short-term trends (e.g., employment levels and weather); and
- focus on broad economic data.
When looking at the Fed’s releases, also review the Federal Open Market Committee’s voting results to see if members agree on policy moves.
The BoC’s policy announcements:
- vary in length and structure;
- swing between using language similar to the Fed’s (e.g., “transitory effects”) and more alarming terms (e.g, “puzzle,” “sharp correction” and “steep rise”); and
- present broad inflation and growth data, but also comment on secular trends.
The BoC’s other releases show what data they’re analyzing, and touch on the role of central banks. For instance, in May 2015, Poloz gave a speech called “The Way Home: Reading the Economic Signs,” which outlined indicators the bank is watching.
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Katie Keir is content editor of Advisor Group.