Bank of Canada to abandon general rate guidance: Poloz

Fri Oct 10, 2014 12:06pm EDT
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By Randall Palmer

WASHINGTON (Reuters) - The Bank of Canada intends generally to abandon guidance on the direction of interest rates because doing so will lead to less volatility in normal times and less market parsing of the central bank's statements, Governor Stephen Poloz told Reuters.

Poloz was speaking in conjunction with the release on Friday of a paper on integrating uncertainty into monetary policymaking, the first he has written since taking over as head of the Bank of Canada last year.

His remarks, less than two weeks before the central bank releases its quarterly Monetary Policy Report and next rate statement, came as markets debate whether Poloz will give up the neutral stance as to direction and timing of the next rate move.

No one expects a change in the central bank's 1 percent overnight lending rate on Oct. 22, but markets are looking carefully at the language used.

It was not certain from his remarks when Poloz would drop the word "neutral" from the bank's rate statements, but he made clear he did not intend in the future to return to explicit mentioning of a tightening or easing bias.

In his paper, he wrote: "It is my belief that forward guidance should be seen as a useful tool in the central banker's kit, but one that should be reserved primarily for use at the zero lower bound, as a form of additional insurance that the economy will return to equilibrium."

The zero lower bound occurs when the central bank cannot cut its reference rate because it is at or near zero, a situation which prompted the Bank of Canada in April 2009 to pledge to keep the rate on hold through the second quarter of 2010.

The bank has called this "extraordinary forward guidance," but Poloz also referred to dropping the less extraordinary kind of forward guidance used by his predecessor, Mark Carney, in early 2013 - language which said some modest withdrawal of stimulus would be needed after a period of time.   Continued...

Bank of Canada Governor Stephen Poloz takes part in a news conference in Ottawa July 16, 2014. REUTERS/Blair Gable