The Bank of Canada is among the least transparent major central banks in the world.
I made this point in my weekly column for the Globe and Mail late last year. Thanks to former Federal Reserve governor Kevin Warsh's work for Mark Carney (PDF), there was suddenly empirical evidence to support an argument that I had until then based mostly on impressions, such as the relatively cloistered nature of the Bank of Canada's Governing Council. I couldn't let the moment pass undocumented. It helped that it was the slow holiday period, where editors are so desperate they will accept most anything, even several hundred words on central bank transparency.
For reasons of fairness, I am compelled now to acknowledge a significant shift by Bank of Canada Governor Stephen Poloz on the transparency spectrum. He appears to have shuffled just a little towards the light. The Bank of Canada is still one of the least transparent central banks, but maybe a little less so than it was at the end of 2014.
“Let me now give you some additional insight into our policy deliberations,” Poloz said in his opening statement at the press conference that followed his surprise interest-rate cut last month.
Jan. 21, 2015 may have been the first time in history a Canadian central bank governor uttered these works. My career of chronicling central bankers and finance ministers started not long after Gordon Thiessen created the Governing Council. I never have heard a Canadian central bank governor make a point of describing the discourse that led to any particular decision. A few paragraphs in a statement to the press falls short of the detailed minutes released by the Fed and other central banks, but there is no denying that the public knows more about what prompted the latest policy decision than it ever has before.
Poloz already had become the first governor to use a press statement for something other than reiterating things the public already knew. His willingness to add some layers of context to his decision making could mitigate future surprises by enhancing the understanding of the indicators and issues that most concern policy makers. Poloz revealed in the statement that policy makers worried about the message that would be sent to indebted households, but said that he and his advisers concluded that the best way to guard against a housing bust was to avoid European-style economic stagnation.
He acknowledged concern about surprising markets and he shed light on how the Bank of Canada manages risk. He said in his statement that policy makers confronted a realistic scenario under which oil at $50 a barrel would add at least another year of lethargic growth to the central bank’s already dim outlook. This, said Poloz, “was considered unreasonable.”
Overall, it was one of the fullest descriptions of an interest-rate decision that a Bank of Canada governor ever has given. Poloz could do more. He could begin recording meetings of the Governing Council and creating a transcript so future policy makers can learn from the current group’s successes and failures. Poloz could order his deputies to give more speeches and do more interviews in order to enhance the public’s understanding of economics and monetary policy.
But by using his quarterly statement to the press to add colour to the Bank of Canada’s thinking, Poloz may have introduced a uniquely Canadian fix to the problem: transparency if necessary, but not necessarily transparency. Some will question whether transparency is a problem that needs fixing.
To be sure, Poloz ultimately will be judged on the economy’s performance and the quality of his policy. Still, to those who still believe in the benevolent central bank working in the shadows, I submit that you consider the movement in Congress to audit the Fed. This is an ideologically based campaign that caught fire because the Fed had dismissed the importance of explaining itself to the public. The Fed is now one of the most transparent central banks. It had no choice; its credibility was at stake.
Poloz and the Bank of Canada may long for a day when they will again occupy the back pages of the business press. If that day even comes, it is a long way off. It is therefore in Poloz’s interest to keep the public on side. He justified the surprise interest-rate cut as “insurance.” Transparency is the same thing. By engaging the public now, he increases the chances that he will be given the benefit of the doubt in the future should he find he needs it.