Prime Minister Justin Trudeau wasn’t the only one in Ottawa who stunned pundits in 2015. Last January, Bank of Canada governor Stephen Poloz shocked everyone by cutting interest rates. The move caused consternation. The public was under the impression that the central bank’s chief worry was housing prices and therefore higher borrowing costs.
But when policy-makers studied the data, their models foretold a dark future from the collapse of oil prices. Their models were true: the economy contracted in the first half of 2015, as commodity wealth evaporated and business investment retreated. (The Bank of Canada would cut its policy rate a second time in July, dropping the overnight target to its current 0.5%.) At the time, many observers were skeptical of the January decision. In fact, I wrote an article about how the central bank risked making things worse by scaring people. But it’s difficult to argue now that Canada’s interest-rate cuts were a mistake. “[Poloz] took a little bit of heat for cutting rates, and it turned out he saw something troublesome in the numbers,” Bank of Nova Scotia chief executive Brian Porter told me in October. “He made the right call.”
Those words will mean a great deal to Poloz and his deputies on the Governing Council, the six-person committee that sets interest rates. If demand for business loans is picking up at Scotiabank, it is in part because executives have faith in the central bank. They believe the Bank of Canada’s message that the worst likely is over. And they believe borrowing costs will be stable. No more surprises.
Credibility is delicate. Ask Ben Bernanke, the former chairman of the U.S. Federal Reserve. Few Americans realized their central bank had the ability to create hundreds of billions of dollars out of thin air. That resentment lingers. A significant minority in Congress is determined to restrict the Fed’s autonomy. “I tried my best to bring our story to the broader public,” Bernanke said in the Financial Times. “I wish I could have done more. Perhaps, in retrospect, I should have done more.”
Communication is now a priority for most central banks. The Fed was an opaque cult of personality under Bernanke’s predecessor, Alan Greenspan; it is now the most transparent central bank in the world. Last year, the Bank of England overhauled its communications policy and now releases more detailed minutes, among other things. The European Central Bank began releasing minutes last year. These changes are recognition that central banks are no longer the stage managers of the financial system, hidden in the wings. They are now the stars of the show.
Measured against its peers, the Bank of Canada is something of a black box. There is no official record of the debate that goes on for days ahead of each interest-rate decision. The deputies on the Governing Council speak on the record a couple of times a year, and when they do, they rarely deviate from the script. This is by convention. The governor sets the tone. He alone has the statutory authority to set interest rates. The Governing Council is a convention, too.
Poloz has made subtle changes. The opening statements at the press conferences that follow the release of the Bank of Canada’s quarterly economic reports used to be forgettable. For the past year, they have offered important insight into the decision. In October, Poloz had his deputy, Carolyn Wilkins, read the statement—a symbolic reminder that the Bank of Canada is a team, not a one-man show.
Poloz needs to do more. Minutes are tricky because the Governing Council decides by consensus, not votes. But he could loosen the leash on his deputies and encourage them to speak more often and more freely. He could also hold a press conference after each rate decision instead of only half of them. The idea is to ensure the public follows along. The Bank of Canada got a controversial decision right last January, but it could miss in the future. The Fed’s experience shows what happens when the public feels blindsided. Better to pull back the curtain before that happens.
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