The Bank of Canada is so poor at documenting what goes on when its leaders sit down to discuss interest rates that it gave itself a failing grade among its peers.
Monetary policy is made behind closed doors for obvious reasons. But in the spirit of transparency, most major central banks release minutes of their deliberations a few weeks after the decision is made. The Federal Reserve in the United States goes so far as to publish full meeting transcripts after five years.
Canada’s central bank does nothing of the sort. The governor might share some words about what was discussed in the opening statement at the quarterly press conference that always follows the release of a revised outlook and an interest-rate decision. That covers four of eight scheduled policy announcements. The other four are followed a day later with a speech by the governor or one of his deputies that updates the central bank’s thinking on the economy. The detail of the policy discussion varies from speech to speech.
The opacity is out of step with the times and the Bank of Canada knows it. Earlier this year, a group of researchers that included Jeremy Harrison, the central bank’s managing director of communications, and Sharon Kozicki, a deputy governor, published a report that gave the institution a score of three out of a possible 12 for meeting summaries and minutes, dead last behind a list of nine central banks. The Bank of Japan scored the highest with a 6.25 rating.
But the Bank of Canada is about to catch up, at least partially.
The first rate decision of the year on Jan. 25 will be followed two weeks later — on Feb. 8 — with a summary of the debate that caused Macklem to arrive at his decision. It will be the closest the public has ever come to getting a look under the hood of how policy is made.
“I congratulate them on this decision,” said Bank of Montreal chief economist Doug Porter. “I think it’s definitely a step in the right direction.”
The Bank of Canada has long endured criticism of its relatively cloistered approach to communication. The governor gives speeches and grants interviews fairly regularly, and his deputies tend to speak a couple of times a year. But they are reluctant to share how they come to their various decisions to raise or lower interest rates. The International Monetary Fund criticized them for it last year in a transparency review in late September that was accompanied by recommendations.
It’s an idea that’s been around for a while … we felt like it was time to do it
The most notable suggestion was to publish a detailed summary of monetary policy deliberations. The central bank agreed.
“It’s an idea that’s been around for a while,” Macklem told the Financial Post’s Kevin Carmichael in December, adding the IMF was asked to take part. “They came back with that recommendation, and so, yeah, we felt like it was time to do it.”
‘Tough to judge’
The summaries should give more details on Governing Council members’ views and give economists a better sense of what’s on the central bank’s radar and what their next move is — provided these summaries have enough information. The central bank’s previous opacity left some on Bay Street with doubt the Bank of Canada is truly ready to pull back the curtain.
“It’s tough to judge without seeing the first set how this will make a meaningful difference, or if it’ll really help with transparency in a significant way,” Porter said.
The Bank of Canada has been engaged in a running feud with some of Bay Street’s top economists, who describe policymakers as indifferent to the bets investors make based on where they think interest rates are headed. Porter locked horns with the Bank of Canada in September 2017 when he called the central bank’s lack of communication ahead of its first increase in seven years an “epic fail.”
Porter said the most interesting piece of information that could come out of these meetings would be the extent to which deputies hold dissenting opinions. He said he’ll also be keeping an eye out for any economic indicators that the deputy governors are focused on.
However, Porter also said the quarterly outlooks and press conferences are already rich in detail, so the summaries might not move the needle that much. “A little bit more transparency is a good thing, and this presumably will lead to a little bit more transparency,” Porter said. “But I don’t think it’s going to fundamentally change how people like me assess what the Bank of Canada is going to be doing.”
Bay Street and the Bank of Canada have found themselves out of sync repeatedly in recent years. Royce Mendes, the head of macro strategy at Desjardins Group, went so far as to give Macklem the moniker of “enigmatic boyfriend” in one of his client notes.
Mendes’ note highlighted the consequences of a vague communication style, arguing that the secretive nature of Canada’s central bank plans have often confused markets. Economists at National Bank documented in a note on Jan. 23 that the central bank defied market consensus at five out of eight meetings last year.
I don’t think it’s going to fundamentally change how people like me assess what the Bank of Canada is going to be doing
Doug Porter, chief economist, Bank of Montreal
A key difference between the Bank of Canada and the U.S. Fed is governance. It’s easier for the Fed to release minutes because each of the members of its policy committee cast a vote. The only member of the Bank of Canada’s policy committee who has a vote is Macklem, although by the convention, the members of the Governing Council strive to come to a consensus.
“Questions arise about how much decision-making bodies can deviate from speaking with ‘one voice’ and which parts of deliberations could be shared to improve insight into the consensus-building process,” the Bank of Canada report said.
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Mendes argued that Bank of Canada meeting summaries may not hold the same value as the Fed’s minutes because of this difference as it would be difficult to attribute individual opinions. He advocated for a shake-up in the structure. “Why not move away from a system that seems somewhat archaic and is based on a sole monetary policy decision maker, and move towards a voting based system to strengthen governance to increase transparency?” Mendes said.
Former deputy governor Lawrence Schembri has also flagged this issue, writing that the central bank made two important steps in enhancing governance and transparency: recruiting an external deputy governor, and adopting meeting summaries. He said the latter could give the public an “enhanced understanding” of policy decisions and anticipate interest rates somewhat more easily.
Still, Schembri said his former colleagues could do a lot more.
“But while these reforms are useful, they still leave the Bank of Canada behind its peers in terms of governance and transparency,” Schembri wrote, adding that other central banks publish projected rate increases consistent with economic outlooks. “That’s currently not the case in Canada.”