OTTAWA (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 made 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.
A Bank of Canada spokeswoman said the central bank looks at a broad range of indicators when assessing the economy, publicly discussing the data it reviews and how it interprets them. She noted Poloz has highlighted the importance of the markets interpreting economic data for themselves.
But market watchers say uncertainty resulting from less explicit guidance 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.”
Wright and other economists said that while the bank does not want to confuse the market, other factors have muddied the waters, including the unknown fallout of crude’s dramatic price drop on oil-exporting Canada.
“It remains uncharted territory,” said National Bank Financial chief economist Stefane Marion. “There’s no way that models are built for that.”
They also note that with about 1-1/2 years of leadership under his belt, Poloz is a relative newcomer who has made some clear breaks from the style favored by Carney.
“He surprised everybody a month ago and that means a couple of things,” said Carl Weinberg, chief economist at High Frequency Economics. “Most importantly, we don’t fully understand what he thinks, and we may not be privy to all the information that he has.”
There are signs that investors’ frustrations at being blindsided by January’s rate move have not fallen on deaf ears.
On Wednesday, for instance, the bank delivered a concise, plainly worded policy announcement.
David Rosenberg, chief economist at Gluskin Sheff + Associates, said Wednesday’s statement and comments made by Poloz in late February have helped to reestablish markers that markets can focus on.
The bank has made very clear that if growth is at, or above, 1.5 percent in the first half of the year, rates will not be cut further, and that it is looking at a base case assumption of Brent crude at $60 a barrel, he said.
“I was actually very encouraged by the tone and by the clarity,” he said. “I‘m actually feeling as though we have parameters that we can invest around.”
Still, analysts and markets are not forgetting the shock of January’s cut and the potential for further surprises.
“We’ve had Poloz do a U-turn, so sure, we have a sense of what he’s saying today,” said Emanuella Enenajor, Canada and U.S. economist at Bank of America-Merrill Lynch. “But how confident are we that there’s not another 180-degree turn three months from now if the data start to look soft?”
Editing by Jeffrey Hodgson, G Crosse and Peter Galloway