A New System of Fixed Dates for Announcing Changes to the Bank Rate
A New System of Fixed Dates for Announcing Changes to the Bank Rate
Summary of consultation results (30 October 2000)
Beginning in November 2000, the Bank of Canada will introduce a new system of eight "fixed" or pre-specified dates each year for announcing any changes to the official interest rate it uses to implement monetary policy. After considerable analysis, the Bank has concluded that a fixed-date approach will lead to more effective monetary policy for Canada. Fixed announcement dates will replace the current approach to announcing monetary policy actions under which the Bank can, in principle, adjust interest rates on any business day. In introducing the new approach, the Bank of Canada will join many other central banks in the industrialized countries, including the U.S. Federal Reserve System, the Bank of England, the European Central Bank, the Bank of Japan, the Swedish Riksbank, the Reserve Bank of Australia, and the Reserve Bank of New Zealand, all of which have adopted pre-set dates for announcing interest rate changes.
This paper describes the basic features of the proposed approach, elaborates its key advantages, and identifies issues for consultation.
Monetary Policy, Inflation Control, and the Current Approach to Bank Rate Adjustments
The goal of monetary policy in Canada is to contribute to a productive, well-functioning economy by preserving an environment of low and stable inflation. To achieve this goal, the Bank and the Government of Canada have agreed on an explicit target for inflation control, which is currently within a range of from 1 to 3 per cent. The instrument that the Bank uses to ensure that inflation remains within this target range is the Bank Rate - the rate of interest that the Bank charges on short-term loans to financial institutions.1 The Bank announces a change to the Bank Rate when it concludes that an adjustment is needed to keep the future rate of inflation within the 1 to 3 per cent target range. These adjustments take into account the fact that it takes between 18 and 24 months for a change in interest rates to work through the economy and have its full effect on inflation.
Until now, the Bank has maintained a relatively flexible approach to announcing changes to the Bank Rate. Technically, the Bank can adjust the rate on any business day (Monday to Friday) it considers appropriate. Within this approach, the Bank has assured financial markets that any such announcements would be made at 9 a.m. In theory, therefore, financial markets have to be prepared for possible changes to the Bank Rate at 9 a.m. on any business day throughout the year.
Basic Features of the Bank's Fixed-Date Approach
The key features of the Bank's new approach to announcing monetary policy actions are:
1. Eight specified announcement dates each year
There will be eight specified dates during the year when the Bank may announce a change to the Bank Rate. Eight is an appropriate number of announcement dates because they tie in naturally with the Bank's current processes of analysis of economic developments and their effect on future inflation. Given that the underlying factors affecting the economy and inflation tend to change relatively slowly, eight dates spaced over the course of the year provide both a reasonable amount of time for the Bank to assess inflation trends in the economy and a sufficient number of opportunities for it to take any necessary action. By way of comparison, the U.S. Federal Reserve System and the Reserve Bank of New Zealand use eight fixed dates a year, the Bank of England has opted for 12, and the European Central Bank has 25.
The specific scheduling of the eight dates reflects the flow of data and information that the Bank uses to gauge changing trends in the economy and in inflation pressures. These data include, for example, national income and expenditure accounts and data on inflation, production, and demand in the economy. Four of the fixed dates will occur after a detailed analysis of economic trends and their implications for possible monetary policy actions that the Bank undertakes following the release of the quarterly Canadian National Accounts (typically at the end of November, February, May, and August). Decisions based on this analysis will be announced on dates to be established in the third or fourth week of January, April, July, and October. The other four fixed dates will be scheduled roughly mid-way between these dates, or in the first week of March and in the last week of May, August, and November. Decisions announced on these latter four dates will be based on an updated economic analysis, which takes into account data released or revised since the previous announcement date.
Announcement dates will be at least five, and at most eight, weeks apart. The Bank will make public the precise fixed dates for the period November 2000 to the end of 2001 by the end of October 2000, following further analysis and consultation.
Under a fixed-date approach, the Bank would retain the option of taking action between fixed dates, although it would exercise this option only in the event of extraordinary circumstances.
2. Announcements at 9 a.m., on either a Tuesday or Wednesday (subject to consultation)
The Bank is proposing that, subject to consultation, it will make the announcements at 9 a.m., as is the current practice, on either a Tuesday or Wednesday.2 Since it is preferable that announcement dates not coincide with the release of major Canadian economic data, which could result in confusion about the rationale for monetary policy actions, Thursdays and Fridays should be avoided. Economic data releases tend to be scheduled towards the end of the week.
Some announcement dates could occur in weeks when the federal government holds a periodic Tuesday treasury bill auction. Hence, a Tuesday announcement date could occur the same day as a treasury bill auction. The Bank would therefore like to hear the views of interested Canadians on which announcement day - Tuesday or Wednesday - would best preserve the smooth functioning of financial markets. (Please see the section "We invite your views" at the conclusion of this paper for details about how to submit views to the Bank.)
3. A press release whether or not there is a Bank Rate change
On each of the eight fixed dates, the Bank will issue a press release announcing its decision either to change the Bank Rate or to leave it unchanged. The announcement will be made simultaneously on the Telerate Page and on the Bank's Web site. The release will include a short explanation of the key factors influencing the decision. The release will also set out the Bank's view of the balance of risks for inflation in the period ahead.
4. Integration with other key Bank monetary policy announcements
The fixed-date announcements will be integrated with other key Bank monetary policy announcements, including the semi-annual Monetary Policy Report and the semi-annual Monetary Policy Report Update, as well as speeches and other public pronouncements by the Governor and other members of the Governing Council. The purpose is to provide a more regular, frequent, and continuous process of public communication on the Canadian economic and financial situation and what it means for monetary policy.
For example, decisions announced on the fixed dates in April and October will be based on the analysis completed for the Monetary Policy Report that will be published two weeks later, in May and November, respectively. Similarly, decisions announced on the fixed dates in January and July will be based on the analysis completed for the Monetary Policy Report Update that will be published two weeks later, in early February and August, respectively.
Advantages and Benefits of the Fixed-Date Approach
The Bank believes that adopting a fixed-date approach to announcing monetary policy actions will improve the implementation and effectiveness of monetary policy in Canada. The key advantages and benefits of the new approach include:
Reduced Uncertainty in Financial Markets
The new system will reduce the uncertainty in financial markets associated with not knowing exactly what day the Bank might announce a Bank Rate change, and it will permit market participants to prepare more fully for that possibility. In particular, it will eliminate the so-called "9 a.m. watch" that has occurred in the past when participants in the foreign exchange and fixed-income markets thought the Bank might announce an interest rate change and slowed trading activity while waiting to see if there would be such an announcement at 9 a.m. With announcement dates specified in advance, and with a press release issued whether or not there is a Bank Rate change, fixed dates will allow market participants to plan and operate more efficiently.
Enhanced Focus on the Canadian Context
Fixed announcement dates will create eight new, regular opportunities for the Bank of Canada to report to the public about the economy and the conduct of monetary policy, and to provide individuals, businesses, and governments with further information that they can use in their decision-making. This should help market participants and the public to better understand the Bank's assessment of the balance of forces that affect inflation in Canada, and to anticipate the direction of monetary policy. In addition, since the Bank's schedule of fixed announcement dates will be different from the fixed-date schedule of the U.S. Federal Reserve System, it will allow more attention to be focused on Canadian economic circumstances in the lead-up to, and following, monetary policy announcements here in Canada.
Greater Emphasis on Medium-Term Policy
Fixed dates will also provide a regular opportunity for the Bank to emphasize the medium-term perspective of monetary policy and to relate recent economic and financial developments to the underlying trends over a medium-term horizon. This is important because monetary policy actions are based largely on considerations about the economy and inflation 18 to 24 months down the road, not on the most recent individual data releases. Improving public awareness and understanding of the underlying trends that drive monetary policy decisions, as opposed to short-term fluctuations in the economy and individual data releases, should help increase understanding of the monetary policy responses based on those trends.
Enhanced Transparency, Accountability, and Dialogue with the Public
Regularly explaining the reasons for either changing or not changing interest rates will enhance the transparency of monetary policy and should help financial markets to better understand and anticipate the Bank's actions. The eight new occasions to communicate will also reinforce the Bank's accountability by further enabling it to link the conduct of monetary policy with the achievement of the inflation-control target. Finally, the new communication opportunities, coupled with Bank publications such as the Monetary Policy Report and the Monetary Policy Report Update, and with speeches by the Governor and other members of the Governing Council, will provide the basis for more regular commentary by analysts and the media and for greater continuity, over time, in the Bank's dialogue with key audiences and the public.