The Bank of Canada has always kept the curtain closed on how it makes interest-rate decisions. That’s about to change.
(Bloomberg) — The Bank of Canada has always kept the curtain closed on how it makes interest-rate decisions. That’s about to change.
The central bank will publish a “summary of deliberations” on Wednesday from its late-January meeting, at which policymakers opted to raise the overnight lending rate to 4.5% and hold it there for a while.
The new report is the first time the Bank of Canada has given such a glimpse into the inner workings of its six-person governing council. It comes after a year of intense pressure on Governor Tiff Macklem — one that has seen politicians on both the right and left heap criticism on the central bank.
Here’s why Macklem is opening the bank to more scrutiny.
Inflation Miss
Macklem has said the bank was considering this move for a long time, following the model of the US Federal Reserve and the Bank of England, which release pages of detailed minutes after each rate decision. The bank got a nudge last year from the International Monetary Fund, which urged it to become more transparent.
But Wednesday’s release is also part of a broader effort to repair the central bank’s credibility, which was was dented by its failure to forecast the spike in inflation and by the resulting U-turn to tighter monetary policy.
One of Macklem’s first acts as governor in 2020 was to provide “extraordinary forward guidance” — an explicit promise that the policy rate would remain very low for a long time as economy healed from the pandemic. The surge in consumer prices that began in 2021 took policymakers by surprise, forcing Macklem to break the promise and deliver eight straight interest rate hikes, starting in March of last year.
That has burned homeowners who believed him and took out large variable-rate mortgages to buy properties during the pandemic housing frenzy. Home prices began to drop as soon rates moved up, and ended last year down 13% from the peak.
Political Pressure
Macklem has taken more heat from elected officials than any Canadian central bank chief in decades. On the right, opposition Conservatives claim the bank wandered outside of its mandate with its quantitative easing program at the start of the Covid pandemic. The allegation is that, through huge government bond purchases, the bank effectively bankrolled Prime Minister Justin Trudeau’s deficit spending.
On the political left, lawmakers have criticized Macklem for raising rates too quickly.
The Bank of Canada has also faced carping from economists about its habit of surprising financial markets. The governing council shocked traders by raising the policy rate a full percentage point last July — it’s still the only Group of Seven central bank to do that in one rate move this cycle. Three months later, it surprised in the other direction, lifting rates 50 basis points when markets expected 75.
Publishing minutes “will help market participants understand the options that were on the table,” Royce Mendes, head of macro strategy at Desjardins, said by email. “I don’t think it will solve the problem of the Bank of Canada surprising markets more often than the Fed does.”
Consensus vs. Dissent
The Bank of Canada comes to its rate decisions by consensus rather than by the votes of members. So, unlike the Fed and the Bank of England, the minutes probably won’t spell out the individual recommendations of policymakers. There’s not expected to be a Fed-style “dot plot” outlook for rates.
Instead, the summary may expand on ideas and debates that Macklem and Senior Deputy Governor Carolyn Rogers talked about in the press conferences that follow four of the eight rate decisions each year, or provide other context on the state of the economy. Whether the new reports will move markets is still unknown. They may challenge traders’ interpretations of the decisions taken two weeks earlier, or simply reinforce them.
“It sounds like this will be more of a summary of deliberations than a detailed account of what was said or transpired at the meeting,” said Josh Nye, an economist at Royal Bank of Canada. “Since governing council tends to speak with one voice, unlike the Fed, we doubt there will be much dissent or difference of opinion showing up in the BOC’s minutes.”
–With assistance from Stephen Wicary.
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