OTTAWA: The Bank of Canada has been puzzled at times, unsure at others, and not shy about saying what it doesn't know, a frankness that helps its credibility but has left markets struggling to adjust.
"I don't have to remind you how many sources of uncertainty we face," Bank of Canada Stephen Poloz said in Santiago on Friday, reiterating what has become the bank's candid assessment of puzzling times.
Under Poloz's tenure, the bank has opened up and adjusted communications in ways that markets generally like, even if it comes with more volatility.
Since he took the helm in 2013, the bank dropped forward guidance that gives a direct hint on the next move in interest rates. It also put ranges around its US and Canadian growth expectations, effectively broadening its forecast, and moved to a risk-management approach to monetary policy.
However, unlike its US and British counterparts, the bank does not publish minutes of policy meetings, which would shed light on policy discussions and possibly show dissent or unanimity around decisions. While including some frank language about what he does not know, Poloz's message has become more nuanced and often more difficult for markets to understand, if only because more information does not always add clarity.
"Markets like clear road maps to central bank policy," said Frances Donald, senior economist at Manulife Asset Management in Toronto. "What Governor Poloz has given us is a more complex and complicated road map." Last month, a surprise admission by Poloz during a press conference that policymakers had considered cutting rates roiled the Canadian dollar, in part because no mention had been made of that option in the bank's statement hours earlier.
Poloz made the case for incorporating uncertainty into policy decisions in a 2014 discussion paper, saying that for policymakers, uncertainty was not an abstract but "a daily preoccupation" - an admission that picking specific forecasts and targets was a fool's game.
He said the purpose was to "inject a little more realism about uncertainty into the narrative" and trust markets to deal with the flow of data. In its October monetary policy report, the bank used the word "uncertainty" 12 times, both in reference to external forces and the bank's own expectations.
Last year, stumped by the stalled recovery in exports, Poloz told a reporter that "if you get some good ideas, let me know" - a candor some appreciate. "Personally, I think it slightly enhances their credibility, basically admitting that there are a lot of things they simply can't know at this point," said Doug Porter, chief economist at BMO Capital Markets, in Toronto. Central bank watchers expect to see more of that language in the bank's statement next month as it tries to assess the impact of the US election. Given how exposed Canada's economy is to global factors like oil prices, market players say the central bank has no choice but to acknowledge the unknown.
"It's hard to say there's a better alternative," said Rahim Madhavji, president at KnightsbridgeFX.com, in Toronto. "You want transparency, you want them to give the information they're giving."
Some worry that the more information the bank gives, the harder it is to know what matters to decision-makers. Last month the bank said that it was dropping one measure of core inflation in favor of three measures, confirming what many analysts had already suspected - that the bank was looking beyond the headlines everyone else was watching.
The bank has also put bands around its growth forecasts and discussed alternative ways of measuring the output gap - a tough task because potential output can only be estimated, and may be influenced by global demand, two factors that have seen the bank repeatedly revise their estimate of when the gap will close.
"In one sense, they're being very obvious about their own limitations," said economist Dana Peterson at Citi in New York.
"On the other hand, they're providing less and less information that would pin them down to anything." For now, it's an honesty some are willing to try.
"Not having a crystal ball is fine," said Scott Smith, director of hedging solutions at Cambridge Global Payments, in Toronto. "But pretending you have a crystal ball and mixing up the messages is obviously a lot worse for markets."
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