MNI INTERVIEW: BOC May Benefit From Ending Guidance-Ex Adviser

The Bank of Canada may benefit from dropping forward guidance at the January rate meeting because the benefits are fading as tightening draws near and policymakers' credibility will take a hit if they make an unscheduled move, former adviser Angelo Melino told MNI.

“It's a dangerous thing to continue into 2022, I hope that come January they get rid of this extraordinary forward guidance," said Melino, a University of Toronto professor who advised the bank during the global financial crisis.

Guidance anticipating a rate increase when full output returns and inflation stabilizes around the BOC's 2% target was introduced by Governor Tiff Macklem in July 2020 as the policy rate was cut to a record low 0.25% during the pandemic slowdown. Macklem has already shifted the goalposts from the second half of next year to the middle quarters, and in both cases investors bet he will act sooner.

"The forward guidance, it has played a positive role—I think it's gotten to the stage now where it’s no longer going to be playing a positive role," Melino said. "The bank doesn't know when the lift-off is going to be, but it’s getting close." The BOC has decisions in January, March and April and most economists see a rate hike in April, the start of the guidance window.

Canada risks being tagged the "unreliable boyfriend" like the Bank of England, Melino said, following surprises to markets this week with Andrew Bailey and earlier under Mark Carney. While at the BOC, Carney also used a "conditional commitment" and hiked rates just slightly ahead of when it was due, a move investors at the time had little issue with.

RETURNING TO POLOZ'S DICTUM

"If the markets start to think that these predictions are commitments, then it can cause a lot of credibility loss for the Bank," Melino said. The BOC has lauded forward guidance for amplifying its QE program aimed at holding down borrowing costs with rates bottoming out, as did Melino.

Dropping the language now would free Macklem to take the best path through contrasting risks, Melino suggested. “Inflation is taking off, Omicron is taking off, things are moving in different directions. It's not clear when and what they're going to do,” he said.

Macklem embraced guidance just after taking over from Stephen Poloz, who famously said investors become attached to code words rather than doing their own homework about when a shift in rates is needed. At a Wednesday press conference, Macklem was asked about dropping guidance before a rate increase and declined to comment directly.

“We will be watching the incoming data very closely," he said, and "we will provide the appropriate amount of monetary stimulus for the economy.”