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Carney Says Policy Guidance Useful in Extraordinary Times

Dec. 11 (Bloomberg) -- Bank of Canada Governor Mark Carney said central bank guidance on the path of interest rates may be useful in extraordinary circumstances such as major slumps.

While guidance can be used in normal times to help reset “unrealistic” market expectations for interest rates and counter financial excesses, Carney said it should be used sparingly, and is more useful in times of greater stress.

“While the bank believes it appropriate to be sparing in forward policy guidance under ordinary circumstances, the calculus changes under extraordinary ones,” said Carney, 47, 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 financial analysts in Toronto wasn’t introducing any new policy guidance for the Canadian economy, and told reporters at a later press conference that the lessons of transparency at Canada’s central bank may not be applicable to the U.K. or other countries.

Carney said he would save detailed comments about his Bank of England post for a parliamentary committee hearing next year. He declined to comment directly on what lessons he would bring from Canada, while saying the country was helped during the global financial crisis by policy makers delivering clear messages to the public and coordinating actions.

Normal Times

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.

Current Guidance

Carney said the bank’s current guidance indicates that the timing and degree of policy tightening may reflect in part developments in household debt levels. The guidance has encouraged households to be more prudent, he said, as the share of new mortgages with fixed rates has almost doubled to 90 percent this year, he said.

Recent indications the housing market is moderating are encouraging after signs that some regions were “stretched,” Carney said while responding to audience questions after the speech.

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 will probably stay near zero through at least mid-2015.

Numerical Thresholds

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.

Canada would be among the countries most affected by a drop in output from major economies such as the U.S., Carney said after the speech.

Gross domestic product slowed to a 0.6 percent pace in the third quarter on drops in exports and investment, Statistics Canada said Nov. 30. Carney said that created more economic slack in the world’s 11th largest economy.

That slack “would be slightly larger, but this is on the margin” following the third quarter, Carney told reporters. The central bank had forecast 1 percent growth.

“The momentum is somewhat softer as we signaled in our December rate decision and recent data is consistent with a bit more softness that is there,” Carney said.

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

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

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