I've been reading Bank of Canada publications fairly regularly for 14 years. For the past 13-and-a-half of those years, I've ignored the opening statement the Governor gives at the press conferences that accompany the release of the monetary policy report. The statements were treated as formalities, restating information that already had been published in a press release.
That changed Wednesday. Stephen Poloz read a statement at the beginning of his press conference that was less a regurgitation of existing information, and more a carefully crafted treatise on how the Bank of Canada is approaching its inflation dilemma. His opening remarks – rather than the press release explaining the governing council's decision to leave the benchmark rate at 1 per cent, or the policy report itself – contained the clearest articulation yet of why policy makers aren't panicking at the site of the Consumer Price Index advancing faster than the central bank's target rate of 2 per cent:
"As the temporary effects pushing on inflation begin to dissipate during 2015, unless the economy's slack is absorbed over a reasonable time frame, inflation will drift back down well below target. This will require above-potential economic growth fuelled by rising exports, followed by investment in new capacity."
That's about as close as a central bank can come to adopting explicit forward guidance without actually doing so. As far as Statistics Canada's monthly inflation reports go – ignore them for now because they are a mirage. Pay closer attention to real-economy indicators such as factory production, exports and gross domestic product. The later must consistently exceed growth of about 1.9 per cent – the central bank's estimate of the economy's potential growth rate, or the pace it can sustain without stoking inflation – before there is a reason to worry about prices spiralling out of control. The Bank of Canada predicts Canada's GDP will expand 2.2 per cent this year and 2.4 per cent in 2015. The gap between the non-inflationary potential growth rate and the actual growth rate must be wider to constitute an inflation threat.
For the most part, the Bank of Canada's closest watchers on Bay Street and Wall Street had figured that out. But the central bank needs to reach beyond the bankers and day traders to make sure every economic actor is clear about its intentions. The Bank of Canada's power to affect the economy rests in the public's confidence that it will deliver on its mandate to keep annual inflation at about 2 per cent. When price increases jump above that target, questions naturally will be asked. It's incumbent on the Bank of Canada to be ready with good answers.
"The changes reflect the Governor's desire to connect better with the media and with Canadians," said Jill Vardy, the Bank of Canada's chief spokesperson. "The press release is aimed at bringing clarity to our decision, but because it is succinct, it can't always capture the colour around the decision. So the opening statement is an opportunity to complement the [policy report] and the press release and to connect in a better way with more people."
The Bank of Canada had been struggling to explain itself. At its previous policy announcement, the governing council appeared to exaggerate weakness in the U.S. economy, which created the impression it was looking for excuses to keep interest rates low. In retrospect, any confusion might have had more to do with the constraints of the central bank's communication regime. At a moment when the central bank needed to deliver context, it lacked an obvious vehicle for the job.
Federal Reserve chair Janet Yellen said Wednesday that the Fed is the "most transparent central bank in the world." She can make that claim because the Fed is exceptionally good at delivering context. The press releases attached to its policy announcements tend to be lengthy, and they are followed three weeks later by minutes of the policy discussion. The Bank of England is pretty good, too. It publishes minutes. The Governor also must write an open letter to the government when inflation exceeds the central bank's target.
Canada's central bank lacks any of these venues. It follows a fairly rigid format in its press releases, and it is one of the few major central banks that doesn't release minutes of its policy meetings. The Bank of Canada could change these habits, but conventions are sticky at institutions, especially central banks. Mr. Poloz's reinvention of an existing communications tool is a creative response to something that needed to be addressed now, not at the end of a months-long review of the Bank of Canada's communications program.