MNI CORRECT: BOC Covid Guidance Unclear, Will Tie To Inflation
(Removes a reference to QT in paragraph eight.)
The Bank of Canada said Friday its pandemic interest-rate guidance was unclear and in any future economic slump it will tie pledges more closely to its regular inflation target, a review coming before an election this year where the leading Conservative candidate has said he will fire Governor Tiff Macklem over such policies.
"When EFG (Extraordinary Forward Guidance) is used in the future, the Bank should continually and clearly stress the outcome-based nature of EFG in all Bank communications," Governing Council members led by Macklem said in a response to an external review. That review was done by former Bank of Spain chief Pablo Hernandez de Cos, former BOE official Kristin Forbes and a Canadian academic economist Trevor Tombe.
"Regarding the use of extraordinary forward guidance, the external experts recommend that EFG should always be “conditional” -- that is, clearly tied to the inflation outlook -- and that its conditionality be clearly explained. Governing Council agrees with this assessment."
BOC staff said in a separate assessment that when Macklem introduced interest-rate guidance in July 2020, interest rates were little changed because investors already predicted they would remain low with official borrowing costs near zero and QE being deployed. Guidance may still have held back any bets that interest rates would rise and reduced uncertainty about the future path, the paper argued.
Investors and members of the public for quite a while after the Bank began raising interest rates asked officials if Macklem misled the public with a message that borrowing costs would remain at rock bottom for quite a while. The staff report noted the complexities of a clear and credible public message. "The central bank's EFG communication is often further simplified or interpreted by the media and by people providing financial advice. This can very easily lead to the public understanding or interpreting the guidance in ways the central bank does not intend. When a central bank does not follow what it is perceived to have said, this can be seen as a broken promise."
Staff also later said: "In the future, the Bank should be consistent in stressing the conditionality in all its communications."
The reports also affirmed the bar for using QE or extraordinary guidance must remain high and with a clear exit plan. They also stressed the need to make a clearer distinction between asset purchases to stabilize financial markets and broader QE to prop up the economy. There is little evidence QE fueled the burst of inflation coming out of the pandemic and the emergency policies were useful and necessary to avoid a bigger calamity, the reports said.
Governing Council's response and the research didn't tackle questions such as whether there needs to be any hard upper limit on QE or a plan to change federal law again to account for trading losses tied to the balance sheet.
Canada's central bank like many others drew public anger and calls for reform as inflation surged after pandemic shutdowns were lifted. Friday's review drew similar lessons about improving forecasts to account for supply shocks. The BOC was using QE for the first time and was a leader in removing extraordinary stimulus, including this week when it said even QT will end in coming months allowing the balance sheet to normalize.
Conservative Party Leader Pierre Poilievre has said he will fire Macklem in part for enabling reckless government deficits that drove inflation to 8%. The NDP has also said the Bank held rates high for too long and risked a needless recession. Governing Liberals defended the Bank's independence, while saying they were eager like most Canadians for interest rates to decline.
The Bank's balance sheet grew to CAD575 billion from CAD125 billion during the pandemic including almost half the stock of federal government bonds. The central bank is also booking unprecedented losses tied to QE that required the government to amend legislation to facilitate the accounting.