Bank of Canada to improve communication, models to help tackle future shocks

By Promit Mukherjee

OTTAWA, Jan 17 (Reuters) - The Bank of Canada will communicate more clearly and improve its forecasting models to help predict future shocks, it said on Friday, after publishing a review of the steps taken to tackle the pandemic.

The BoC, like every other global central bank, had to resort to unprecedented measures when COVID-19 stalled the economy, roiled financial markets, cratered demand and stoked job losses.

But many market participants and politicians have criticized these measures as Canada entered a recession and joblessness surged.

The bank announced a review of its pandemic steps in 2023 to identify what lessons it learned from its extraordinary policy actions and better target its response for future shocks.

The bank primarily adopted two main tools to bring the economy back on track - large-scale bond purchases and sharing extraordinary forward guidance, signaling interest rates would be low for a defined period.

The bond purchases, however, were done first to stabilize the financial markets and later to stimulate the economy, a process known as quantitative easing (QE), the bank said.

The bank acknowledged that in future, it could be clearer about the limited circumstances under which it would conduct large-scale asset purchases.

"This would help guard against moral hazard, when market participants take bigger risks thinking the central bank will step in if things go wrong," the bank said.

The bank should outline the purpose of each program, and it should design them to ensure they are temporary and have a clearly defined exit strategy, it added.

"If QE is needed in the future, the Bank could link the size and pace of purchases, as well as the end of QE, more clearly to the inflation outlook," it said.

The bank pushed back against criticism that it had stoked inflation, saying its own analysis showed the policy actions, mainly QE, had not on their own pushed inflation significantly above 2%.

The bank said in future the conditions of extraordinary forward guidance could be more clearly tied to the inflation outlook and could be emphasized more often in communications.

The bank said it agreed with the conclusion of external reviewers who called for improved forecasting tools to help it understand whether inflationary shocks were led by demand or supply.

The bank said it was already working on its next generation of economic models which would help it better capture the role of supply chains in production.

The external reviewers also insisted on improved communications and transparency by the bank which could help it align with the U.S. Federal Reserve and the European Central Bank. (Reporting by Promit Mukherjee, editing by David Ljunggren and Nia Williams)