Bank of Canada Rate Biases
The media loves to pump commentators for predictions on whether the BoC will keep its rate “bias,” not keep its bias, do something unexpected with its rate bias, and on and on. It’s quite the drama over what is usually a 1-3 sentence statement in a BoC press release.
On Wednesday, the Bank of Canada left Canada’s key rate alone. It also chose to leave its 13-month-long rate hike bias intact, saying:
“…the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”
The question some may be wondering is, should this sort of statement mean anything to the average mortgage consumer?
In short the answer is “usually not.” And here’s why.
The Problem With Biases
For one thing, the Bank’s statements have to be interpreted correctly. Most of the time, they’re so vague that they offer minimal predictive value (the quote above is case in point).
Then, there’s the small matter of accuracy. The BoC sets its key rate based on where it sees inflation 18-24 months down the road. But most of the time (especially these days) there is virtually no data that gives the Bank of Canada clarity on inflation two years ahead.
Indeed, despite employing the best data/technology and some of the top analysts in the country, the BoC (like most economists) has tended to be over-optimistic with longer-term forecasts.
And then there’s the question of how long a rate cycle will last. It’s great to know that the BoC may hike rates next quarter, for example, but how long will rates stay elevated? When will they revert lower again?
In most cases, these factors make it hard to read too much into the BoC’s rate guidance—especially since its biases can change without notice (due to unforeseen events or crises).
