Central banks should be trying to minimize volatility but the Bank of Canada has embraced it
The Bank of Canada seems to view volatility is a virtue and it's hurting the Canadian economy.
There is no value whatsoever in surprises, but Poloz seems to think it's best never to send a clear signal and then wait until the last moment and make a decision. Somehow he thinks markets should be able to figure it out, but he's all over the place.
Within the same paragraph of his speech last week there was a contradiction. He talked about starting every meeting with a blank page but then talked about how markets correctly interpreted a word being removed from the statement.
He's been patting himself on the back for months because he won some kind of central bank of the year award but it's nonsense.
What's the best thing you can do for an economy? Provide stability and predictability. It's why the Fed is hiking every second meeting, it's why the ECB is worrying about managing expectations about what will happen at the end of 2019.
Meanwhile, every time Poloz opens his mouth the market is waiting for another U-turn.
Before last week's speech the market was at 50/50 for a hike in July so naturally, everyone is watching and waiting for some kind of signal in the speech. Instead, he talked for 30 minutes about how great the BOC is at communicating. Then, he salted it with some minor comments on negative developments on trade; so the market saw that as the signal and the loonie tanked. Two hours later, he held a press conference and reversed everything saying some recent bad data points didn't change the outlook. It was a comedy.
Now don't get me wrong, it was great for foreign exchange traders. It's if you're glued to the headlines and picking up on the nuances but how are businesses and people supposed to navigate this? People need to hedge, they need to lock in rates, they need to understand what's going on and make decisions and Poloz is trying to make it as difficult as possible. The BOC mandate is to "to promote the economic and financial welfare of Canada."
How is playing a guessing game with markets every few weeks helping?
What's been priced in over the past year? In the past 12 months, the market-implied odds of a hike at this meeting have bounced around from 20% to a certainty. It was at 98% in February then dropped below 50% in late May, then back up to 80% after the latest BOC statement, then back down to 50% in late June and now at about 85% because the BOC business outlook survey was strong. The thing is, Poloz would have had that data weeks ago and could have easily sent a signal instead of keeping the market guessing.
The BOC has faced some challenges from trade but everyone has challenges. You look at the Fed chart - another bank that's been hiking - and it's a smooth ride with some small bumps. If the Fed was playing these kinds of games, the market would be up in arms.
So we finally have some certainty a week or two before the meeting but what about in August? in December? Next year? If you're trying to make investment decisions or currency decisions, they're not helping by waiting until the last moment to decide.
There's not even a playbook. One week they're highly data dependent but then a few poor data points come out and they brush them off. One week they're worried about trade, then the US puts tariffs on Canada and threatens a whole bunch more, then they say they won't react to trade until it's in the data.
What you want is a central bank that's steady, that presents a clear, consistent outlook on the economy and acts on it.
