OTTAWA (Reuters) – The Bank of Canada struck back on Monday against criticism it had not adequately prepared markets for last week’s rate hike after a prominent economist took issue with the central bank’s lack of communication in the nearly two months leading up to the move.
The unusual defense was spurred by a research note published by BMO Capital Markets’ chief economist Doug Porter, who said the bank’s silence between its July and September meetings created a great deal of uncertainty for markets and called the lack of communication an “epic fail.”
The rate hike surprised many economists who had expected the central bank to wait until October. The move followed an initial hike in July, which was well telegraphed to the market.
Spokesman Jeremy Harrison said in emailed comments that market odds of a hike last week were “roughly 50-50.”
“Evidently, a much higher percentage of trading desks were correctly interpreting the bank’s prior messaging that monetary policy would be forward-looking and data dependent, not predetermined,” Harrison said.
“Markets took on board the string of positive surprises in the economic data, especially the Q2 GDP report on August 31.”
Harrison also noted that in July, Bank of Canada Governor Stephen Poloz gave a number of points of context for the bank’s decision at the time and future decisions.
Harrison added that the bank does not usually make public remarks during the late summer period.
Porter was not the only analyst to criticize the surprise hike, and observers are now anxious for further insight on how far or fast rates may rise.
“With an absence of greater communication leading up to that rate hike, we’ve been thrown into the lurch somewhat as to how to interpret monetary policy going forward,” said Scott Smith, chief market strategist at Viewpoint Investment Partners.
Market-watchers are hoping a speech and news conference by Poloz on Sept. 27 will provide more clues.
“The market has interpreted policy going forward one way but the concern is maybe the Bank of Canada hasn’t telegraphed that exactly as they would like,” said Smith.
“If it gets walked back, all we’re going to have is more elevated levels of volatility in the Canadian dollar and financial markets in general.”
A Reuters poll of primary dealers forecast on Thursday that the bank will raise three times in 2018, a more aggressive pace than previously anticipated. [CA/POLL]
The central bank could stand to be more consistent about what it will and will not communicate, given it signaled ahead of the July hike but not the September increase, said Dana Peterson, economist at Citigroup.
“Where’s that line between forward guidance and something that’s not forward guidance?” Peterson said.
But others said the bank may like the element of surprise.
“If the bank is really tilting against this debt bubble that we have growing in Canada, it really makes sense to scare consumers, to really fire that warning shot across the bow and to indicate to consumers that rates are going up,” said Karl Schamotta, director of global markets strategy at Cambridge Global Payments.