File photo of Bank of Canada Governor Stephen Poloz.BLAIR GABLE/Reuters
When Stephen Poloz was a teenage disc jockey, he would deploy a stimulus measure that was sure to get his elders out of their seats and onto the dance floor: "Raindrops Keep Falling on My Head," the Burt Bacharach and Hal David tune that was a No. 1 hit for B.J. Thomas in 1970. "Something familiar and mid-tempo," Mr. Poloz told me in 2013 when I interviewed him for a profile in Report on Business magazine; that was how you pulled the wallflowers off the sidelines at the Whitby Curling Club in the 1970s, he said.
Mr. Poloz's 2015 playlist so far is missing that familiar tune that gets everyone humming and tapping their feet. The January rate cut surprised everyone. Some people liked it, others not so much. Mr. Poloz then jolted his audience again in March, this time be leaving the benchmark rate unchanged at 0.75 per cent. Most observers had decided that a second rate cut would be necessary to stave off whatever disaster prompted the January move. "It seemed to come out of the clear blue sky. That was not helpful," Douglas Porter, chief economist at Bank of Montreal, told the Globe and Mail. "It gave the sense that there was something fundamentally wrong with the economy. It's a blow to confidence."
Mr. Poloz will confront his doubters Thursday in London, England with a speech called "Central Bank Credibility and Policy Normalization". The remarks could be among the most important of his tenure as governor. The apparent zig-zag on policy has hurt his reputation as a calm hand. Mr. Poloz needs to address the negativity he has stirred up with his policy choices this year. If he loses the public's trust, his rock-bottom interest rates won't work. We only will borrow to spend and invest if we have faith the future will be better than the present. And rightly or wrongly, faith in Mr. Poloz and other central bankers is beginning to wane.
Some 20 central banks have implemented at least one stimulus measure this year, quite often taking the public by surprise. It was a rush to the barricade unseen since the worst days of the financial crisis. Except this time, there was no obvious calamity. Each of those central banks had their reasons; and quite possibly, they all had good ones. But from a distance, it looked like panic. The public had gotten used to central banks telling it exactly what they were going to do next. The post-Christmas scramble came without any warning.
Central bankers always warned that the return to precrisis policy settings could be bumpy. Zero interest rates, massive bond-buying programs, extraordinary forward guidance; there was no way to know what would happen when all those programs stopped. We are getting a taste of it now.
Mr. Poloz was among the first central bankers to attempt to recondition market participants to think for themselves. He stopped giving overt guidance on policy last year, saying he couldn't see the future any better than anyone else. "Watch the data" is his new mantra. Mr. Poloz promised to be clear about how the Bank of Canada sees the data. Besides that, the public was on its own.
But the damage already may have been done. Richard Barwell, an economist at Royal Bank of Scotland in London, thinks there still is too much hand-holding. The Bank of Canada has broken with forward guidance in its policy statements, but it still says that a neutral policy setting probably is lower than it used to be. The Federal Reserve in the United States and others have said the same. That's pretty explicit guidance. It means interest rates probably won't rise that fast, and they will stay below historical levels.
What will the public do with that information? Hard to know. Some people might look at it and decide they can borrow more than they can afford because there is no reason to worry about higher interest rates. Others might equate lower interest rates with weak economic growth and put off purchases and investments. "Guidance only adds value when the audience is unsophisticated, but that also means its much more likely that they misunderstand, make bad decisions – which is bad for them and bad perhaps for the reputation of the central bank," Mr. Barwell said in an email.
There is one way to cut down on the confusion: educate. The crisis made central bankers better communicators. They must keep at it. Mr. Poloz's rationale for the January rate cut is clearer now thanks to speeches and interviews. Now he has to convince the majority of the public that it was a good idea.
His decision to address credibility head on is a positive sign. It would be difficult to have confidence in an institution that was either ignorant or in denial.