Skip to main content
opinion

The Bank of Canada is firing back at critics who accuse it of an "epic" communications failure for not prepping financial markets that another rate hike was coming earlier this month.

But the central bank's surprise move may be less of a communications problem than a forecasting miscue.

Even armed with the country's most sophisticated computer models and an army of economists, the Bank of Canada has largely missed the Canadian economy's remarkable 2017 turnaround. And it's been playing catch-up for months.

It's no wonder roughly half the market sentiment and the vast majority of economists surveyed by Bloomberg didn't see the Sept. 6 rate hike coming. To be fair, most private-sector forecasters also underestimated just how fast the economy would shoot out of the gates this year.

But Governor Stephen Poloz and his central bank colleagues were notably slow to acknowledge the rebound, even as evidence was mounting in recent months, including big job gains, surging housing activity and an uptick in exports and business investment. This, after all, was the pickup Mr. Poloz has been watching and waiting for since he took the helm of the bank in mid-2013

Growth surged ahead at a 3.7-per-cent annual clip in the first quarter and 4.5 per cent in the second quarter – best among Group of Seven countries.

Anyone reading the central bank's three quarterly forecasts this year would be hard-pressed to discern a sense of urgency about cooling things down. The bank was calling for a modest pickup in GDP growth and inflation to remain below its 2-per-cent target.

In its January forecast, the bank said the economy would grow 2.1 per cent this year. By April, that was bumped up to 2.6 per cent. And finally, in its most recent July forecast, it was raised again to 2.8 per cent – a roughly 33-per-cent upgrade in the span of just seven months. And the bank will almost certainly boost its GDP call again in its October forecast.

Part of the central bank's challenge is that its forecasts are released on a fixed quarterly schedule. They are out of date virtually from the moment they are published and they can't be reset as fresh evidence emerges. The blockbuster 4.5-per-cent growth spurt in the second quarter was clearly one of those moments.

In response to criticism that it failed to signal it was preparing a September rate hike, spokesman Jeremy Harrison pointed out that the bank made it clear in July that it would be increasingly "data dependent" and that markets "took on board" positive economic surprises, including the late-August release of second quarter GDP numbers.

Back in July, the Bank of Canada expected the economy to slow down in the second and third quarters. We now know that didn't happen, at least not in the April-to-June period.

By midsummer, it was becoming apparent that the economy was not slowing down. It was gaining momentum – a fact highlighted by many private-sector economists. But not by the bank, which by late August was in its preannouncement blackout period.

Complaints about the bank's communications have cropped up sporadically under Mr. Poloz, particularly since he ended the practice of providing explicit "forward guidance" about where the bank is leaning on rates.

Frustration reached new heights last week when Bank of Montreal chief economist Douglas Porter called out the bank for its total silence for eight weeks before the September rate hike. In a research note, he called the lapse an "epic" communications failure.

Mr. Porter isn't alone. Economists Steve Ambler of the University of Quebec at Montreal and the C.D. Howe Institute's Jeremy Kronick argued in a recent Globe and Mail opinion piece that the bank's silence created "significant market uncertainty" and imposed undue costs on consumers and businesses. They urged the bank to release "conditional" interest-rate forecasts to resolve the confusion.

Mr. Poloz acknowledged earlier this year "shortcomings" in the central bank's sophisticated computer models, which he said have been "persistently off track" in the decade since the 2008-09 financial crisis. The bank is now working on a multiyear project to improve them.

It's all well and good for Mr. Poloz and his colleagues to let the data to speak for itself. But reading the shifting economy would be a lot easier if there was more timely and reliable data from the bank to do the talking.

National Bank chief economist Stefane Marion says consumers should expect another quarter-point increase in the Bank of Canada’s key interest rate this year. The central bank hiked its rate Wednesday by 25 basis points.

The Canadian Press

Interact with The Globe