The Globe and Mail reports in its Saturday, Oct. 11, edition that the Bank of Canada aims to reduce its use of forward guidance in the
current policy cycle. The Globe's David Parkinson writes that
rather
than forward guidance, Governor Stephen Poloz says the central bank needs to refocus its
communications on "full transparency
on the risks that the central
bank is weighing." This, he
said, "causes the market to assess
new information more or less the
way as the central bank does."
He said: "Forward guidance works by
taking certain possibilities off the
table. This is tantamount to
giving the market a one-way bet."
One downside, he said, is that
markets can turn volatile when
they perceive that forward guidance
is about to change.
"It is my belief that forward
guidance should be seen as a useful
tool in the central banker's kit,
but one that should be reserved
primarily for use at the zero lower
bound [i.e. near-zero interest
rates]. ... Essentially, the
net effect of dropping forward
guidance is to shift some of the
policy uncertainty from the central
bank's plate back onto the
market's plate, a more desirable
situation in normal times."
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