The Bank of Canada’s (BoC) governor says central banks risk becoming addicted to providing forward guidance on interest rates — a strategy that dulls its impact on markets.
Speaking at the Canada-United Kingdom Chamber of Commerce in London, Stephen Poloz said forward guidance is a valuable part of a central bank’s tool kit but it’s “not a free lunch.”
Poloz surprised the business community in January when he announced the BoC would cut its overnight target rate by 0.25 percentage points to 0.75%.
“We at the Bank of Canada believe statements to explicitly guide market expectations about the future path of interest rates are best reserved for extraordinary times,” he said during a 40-minute speech.
“Keeping forward guidance in reserve ensures that it will have a greater impact when it’s actually employed, otherwise, it becomes addictive and loses some of its impact over time.”
He said recent financial market volatility is a sign the global economic is returning to normal following the Great Recession.
TD Economics senior economist Randall Bartlett described the speech in a note to investors as “a defense of the surprise interest rate cut in January and the Governor's dislike of forward guidance in setting the path of the overnight rate.”
While Poloz appeared “modestly dovish” in his speech, Bartlett said the head of the BoC did not provide any signals about the future path of interest rates.
“He does, however, point out that oil prices…have been ‘below the assumption build (sic) into our forecast’ in January,” Bartlett wrote.
“Today's speech was broadly balanced and doesn't change our view that the Bank of Canada will keep interest rates on hold until the last quarter of 2016.”
