Bank of Canada watchers lament lack of anchors in Poloz era

Fri Mar 6, 2015 2:58pm EST
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By Leah Schnurr and Randall Palmer

OTTAWA, March 6 (Reuters) - Bank of Canada Governor Stephen Poloz has made life more challenging for financial market forecasters, with an approach some say lacks enough guideposts to allow them to properly model the path of future interest rate moves.

In addition to ditching the forward guidance pioneered in Canada by predecessor Mark Carney, now governor of the Bank of England, Poloz has left some economists and strategists feeling less confident about what economic indicators they should work from and how much they will influence policy.

"To some extent, the market's at sea right now, trying to figure out what we should be listening for or looking at," said Doug Porter, chief economist at BMO Financial Group. "Even something as fundamental that most of us thought was an anchor, like core inflation, basically got brushed aside."

The central bank shocked markets in January by cutting rates in response to plunging oil prices, a move done even with core inflation above the bank's 2 percent target. The bank, which has an inflation-control mandate, has said the strength in core is due to temporary effects.

Poloz said at the time of the rate cut that he recognized there might be market consternation at the lack of foreshadowing but that the benefit to the economy of swift action would outweigh short-term volatility.

He has also said it is healthier for the central bank to lay out how it sees the economy, leaving markets to draw their own conclusions from new data.

Still, the resulting uncertainty has changed the dynamic of rate forecasting in Canada, with speeches by Poloz and other bank officials being given far more weight than in the past.

"Every indication we've had since Governor Poloz has taken over is if you don't listen to him, you do so at your own peril," said Royal Bank of Canada chief economist Craig Wright. "It's not just the governor, but the deputy governors and senior deputy governor, as well. Each speech is an event."   Continued...