Sean Kilpatrick
The Bank of Canada is scheduled to make its next interest rate announcement on May 31, and my understanding is that the consensus of opinion among private sector analysts is that interest rates will remain unchanged, because there was no explicit warning of an increase in its April 12 decision.
This consensus of opinion may turn out to be well-founded -- but not for that reason. Recent reports confirm what Bank officials have said several times: the Bank of Canada believes that it under no obligation to provide guidance about short-term interest rates. Governor Mark Carney has already noted that one of the contributing factors of the financial crisis was the private sector's overconfidence in its ability to predict central banks' behaviour.
Central banks do not seek to create surprises for their own sake, and they will do what they can to reduce uncertainty when doing so does not conflict with their policy goals. But providing direction for private sector short-term forecasts for interest rates is not a policy goal in itself.
Curious games can occur when central banks seek to avoid surprises -- monetary policy can become effectively outsourced to financial market analysts. For example, if the consensus opinion is for no rate change, then the central bank may feel obliged to fulfill that expectation rather than risk an interest rate 'surprise', even if the monetary authority's analysis points to an interest rate hike. All private sector forecasters have to do is to incorporate their desired outcome into their forecasts, and their wishes will be fulfilled. There were anecdotes to this effect during the years of the Greenspan Fed, and may have contributed to keeping U.S. interest rates too low for too long.
The Bank has said publicly -- and apparently privately -- that it is not going to let this sort of game get started in Canada, and there's no reason why it should. There are many reasons for thinking that the tightening cycle will begin at the next decision, and the CD Howe Institute's Monetary Policy Council has been calling for increases since January. Financial markets shouldn't assume that interest rates will be left unchanged on May 31 just because the Bank didn't telegraph the decision in April.
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