Carney Says Policy Guidance Useful in Extraordinary Times

Bank of Canada Governor Mark Carney said central bank guidance on the path of interest rates may be more useful in circumstances such as major slumps or financial imbalances.

In normal times -- when it should be used sparingly -- guidance can help reset “unrealistic” market expectations for interest rates and counter financial excesses, Carney, 47, said in the text of a speech he’s giving today in Toronto. In extraordinary or “extreme” times, guidance that can include targets for unemployment and nominal output can be used when conventional tools are exhausted.

“While the bank believes it appropriate to be sparing in forward policy guidance under ordinary circumstances, the calculus changes under extraordinary ones,” said Carney, who will become Bank of England governor on July 1. “Central banks can talk about the future path of policy, and we can, at least on the surface, deliver.”

Carney said his speech, to an audience of financial analysts in Toronto, didn’t contain any new guidance for the Canadian economy. He has a press conference scheduled for 2:15 p.m. New York time.

In normal times the bank shouldn’t make commitments to a specific path for interest rates because evolving economic circumstances mean it “cannot be predicted with certainty in advance,” Carney said.

As recently as October, Carney said investors shouldn’t read too much into the Bank of Canada’s language about future interest rates, describing that as “false precision.” His statement came after the Canadian dollar rose Oct. 23, when the bank changed the wording of its interest-rate announcement to say tighter policy “will likely be required,” rather than “may become appropriate.” The currency fell the next day after Carney said the need for higher rates was “less imminent.”

There may be times under normal circumstances when more guidance can be helpful, such as when interest rates need to remain higher than would otherwise be warranted to correct financial imbalances, according to Carney.

“If the bank were to lean against such imbalances, we would clearly say we are doing so, and indicate how much longer we expect it would take for inflation to return to the 2 percent target,” he said.

In extraordinary times, forward guidance can be an “unconventional policy tool, along with quantitative easing and credit easing,” said Carney.

The Bank of Canada made a “conditional commitment” to keep its policy rate unchanged for more than a year in April 2009, during the global financial crisis, and also signaled it would raise the rate prior to the end of the commitment period. The U.S. Federal Reserve reiterated Oct. 24 that policy interest rates are likely to stay near zero through at least mid-2015.

If needed to make monetary policy credible, officials can announce precise numerical thresholds for inflation and unemployment before reducing stimulus, Carney said. Nominal GDP-level targeting, which corrects for past misses of the inflation target, can also be used if central bankers need an even “more powerful” tool, he said.

To contact the reporter on this story: Theophilos Argitis in Ottawa at; Greg Quinn in Ottawa at

To contact the editors responsible for this story: David Scanlan at; Christopher Wellisz at

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