The following is an abridged version of an article entitled Monetary policy decision making at the Bank of Canada by John Murray.
Before December 2000, the Bank had no fixed or pre-announced schedule for its interest rate decisions. Instead, it stood ready to move whenever action was deemed appropriate. While this approach may appear sensible, and certainly allowed for a great deal of flexibility, experience in Canada and elsewhere showed that it also added uncertainty to what was already a very unpredictable operating environment. Businesses, households and market participants never knew when the Bank was going to move rates. The unscheduled approach also made coordinating the Bank’s forecasting and policy decision-making activities difficult.
To avoid these problems and make the process more predictable, the Bank moved to a system of fixed announcement dates (FADs). The Bank now makes its interest rate decisions on eight pre-announced dates throughout the year, with an interval of six to seven weeks between each one. In exceptional circumstances, the Bank reserves the right to change the policy rate on dates that fall outside this schedule. This has occurred on only two occasions over the past 13 years - on 17 September 2001, following the terrorist attacks in the United States, and on 8 October 2008, as part of a synchronized policy easing with other central banks during the financial crisis.
The timing of the FADs corresponds to the release of key economic information used for the Bank’s forecasting and monitoring exercises. Four of the FADs occur shortly after the publication by Statistics Canada of the quarterly National Accounts, which report on Canada’s gross domestic product and its various subcomponents. The other four FADs occur midway between these dates and are also timed to coincide with the availability of important economic information.
The major participants in the decision-making process are the Governing Council, the Monetary Policy Review Committee (MPRC) and the four economics departments at the Bank.
The Governing Council, which is responsible for making the interest rate decision, includes the Governor, the Senior Deputy Governor and four Deputy Governors. The MPRC, which plays an important role in the discussions leading up to the decision, consists of the Governing Council plus five or six advisers - often supplemented by one or two special advisers - as well as the chiefs of the four economics departments, the heads of the Montréal and Toronto regional offices, and other senior personnel.
The four economics departments are Canadian Economic Analysis; International Economic Analysis; Financial Stability, which focuses largely on the activities of Canadian and foreign financial institutions; and Financial Markets, which concentrates on domestic and foreign financial markets.
These participants share their information, analysis, experience and judgment with members of the Governing Council, who make the final decision. The Bank makes every effort to minimize the inherent uncertainty and risk associated with policy-making by drawing on useful information and insights that are available both inside and outside the Bank. External information includes data series from agencies such as Statistics Canada; current analysis and forecasts from other central banks, governments, international financial institutions and private sector economists; information obtained through the Bank’s Business Outlook Survey of firms and our Senior Loan Officer Survey of banks; and academic research. All of this external information is combined with the contributions of Bank staff.
The information that flows from all of these sources is comprehensive and diverse and contributes, at each stage of the process, to the final decision on monetary policy.
The monetary policy decision-making process comprises five key stages.
Stage 1. Presentation of the staff projection
The presentation of the staff projection to the Governing Council occurs approximately two and a half weeks before the interest rate decision. This projection has at its centre the Bank’s latest forecasting and policy simulation model, ToTEM II. Results from this model are supplemented by information drawn from a number of other sources and alternative models, which examine a specific sector in greater detail (a satellite model) or view the economy using a different paradigm or set of data.
ToTEM II and many of the other models used by the Canadian Economic Analysis Department rely critically on inputs provided by the International Economic Analysis Department and its global macroeconomic model, GMUSE, again supplemented by many other pieces of information and alternative models. Since Canada is an open economy, international developments, such as movements in commodity prices, growth in Asian demand and prospects for the U.S. economy, play a major role in determining the path of the Canadian projection. View other tools used at Bank of Canada to conduct current analysis.
The combined output of all of these models and analyses is blended with judgment to produce a base-case or most likely scenario, which is presented at this first meeting with the Governing Council. A number of key risks and alternative scenarios are also identified at this meeting. Staff then work on these scenarios in preparation for Stage 2, the major briefing.
Stage 2. The major briefing
While Stage 1 involves mainly the Canadian Economic Analysis and International Economic Analysis departments, the major briefing, which occurs approximately one and a half weeks later, draws importantly on all four economics departments. There are six key inputs to this meeting:
(i) an updated monitoring of economic developments and risks;
(ii) the Business Outlook Survey, compiled by the Bank’s five regional offices;
(iii) report focusing on capacity pressures and alternative indicators of inflation;
(iv) an analysis of money and credit conditions;
(v) the Bank’s Senior Loan Officer Survey; and
(vi) an overview of financial market conditions and monetary policy expectations in Canada, the United States and the rest of the world.
Stage 3. Final policy recommendations
The final policy recommendations of staff are typically presented on a Thursday, two days after the major briefing. A senior member of the Canadian Economic Analysis Department or International Economic Analysis Department summarizes and updates the outlook and risks that have been presented in stages 1 and 2, and provides a recommendation regarding any policy action to be taken. The overview and recommendation serve as the starting point for an extensive discussion by the entire MPRC. Tactical and communications issues associated with various policy options are then reviewed, based on a note prepared by the Financial Markets Department. The meeting concludes with each member of the MPRC, except for the six Governing Council members, providing a policy recommendation.
Stage 4. Deliberation and decision
The Governing Council decision-making process begins on Thursday afternoon, immediately after the Stage 3 discussions, and resumes on the following Monday. Members of the Governing Council review the information and recommendations that they have received, exchange views, and explore any outstanding issues and differences in opinion. Further discussions are held on Tuesday, a decision is reached by consensus, and a press release is drafted and approved.
Stage 5. Publication and communication
The final stage of the process focuses on the publication of the press release at 10 a.m. on Wednesday, announcing the Bank’s decision and explaining the reasons behind it. Four times a year, this message is reinforced and expanded on with the synchronous release of the Monetary Policy Report, which provides a more detailed account of Canadian and global economic developments, the Bank’s projections, and the major upside and downside risks that could affect the inflation outlook.
In addition to the Monetary Policy Report, two other publications are released four times a year, approximately one week before the interest rate decision. The Business Outlook Survey summarizes the results of the quarterly interviews that the Bank’s five regional offices conduct with a representative sample of businesses across the country. This survey is an important complement to the other material that the MPRC and the Governing Council rely on and serves as a “reality check” on regional economic developments. The second publication is the Senior Loan Officer Survey, which is based on interviews conducted with major banks and financial institutions in Canada to determine whether lending conditions for businesses have eased or tightened in the previous three months.
The final elements of the Bank’s communication effort around the four issues of the Monetary Policy Report are a press conference by the Governor and the Senior Deputy Governor, as well as their appearances before the House of Commons Standing Committee on Finance and the Senate Standing Committee on Banking, Trade and Commerce.
The Bank places a great deal of importance on communication. It is a critical part of our accountability to Canadians and enhances the effectiveness of monetary policy by increasing the public’s understanding of the economy and our actions.