Measuring how financial sector economists respond to the tone of Bank of Canada communications

The words central banks use to explain policy decisions matter. They can, in some cases, affect financial markets just like changes in policy interest rates do. For this reason, we built a tool to track the tone of the Bank of Canada’s policy communications and assess how tone affects market perceptions.

Central banks influence interest rates on mortgages and business loans by changing their policy interest rate. But the policy rate isn’t the only item in their tool kit. Communications with the public and with market participants are also important because they can shape expectations about the economy and inflation.

Market participants pay close attention to these communications, including those from the Bank of Canada, to get a sense of possible changes in the central bank’s outlook or policy stance.

In turn, the Bank tracks how markets interpret those messages. This allows the Bank to see if its messages are being perceived differently than intended and to identify ways to improve its communications, if necessary.

The tone used in communications can affect how messages are understood and interpreted. Measuring tone consistently is challenging because it must be inferred from the wording of the text, and because of the frequency and large volume of Bank communications. To address these issues, we use advanced machine‑learning methods to measure the tone of Bank communications. We also compare the tone of the Bank’s messages with the tone used in commentaries by economists in the financial sector. What we find is that the tone of these commentaries typically shifts toward the tone the Bank uses when communicating its decisions on the policy interest rate.

We analyze words to measure tone

Monetary policy decisions are complex and are shaped by economic factors such as inflation, labour market conditions and economic growth. The Bank’s communications related to these decisions contain signals about all these elements. Together, these signals establish the tone of the Bank’s communications.

In particular, monetary policy announcements use wording that can be put into three categories:

• dovish wording suggests an easing of monetary policy
• neutral wording suggests neither an easing nor a tightening of monetary policy
• hawkish wording suggests a tightening of monetary policy

To calculate tone, we use a large language model that we fine-tune with examples of the three types of wording. The model reads a document and classifies each sentence as either dovish, neutral or hawkish. It then gives each sentence a value:

• dovish sentences receive a value of -1
• neutral sentences receive a value of 0
• hawkish sentences receive a value of +1

We then calculate the average of all sentence values in the document to obtain a single tone score that ranges from -1 to +1 (Figure 1).

Figure 1: Understanding the policy tone measure

For this analysis, we fed the model all the Bank’s press releases about its policy interest rate decisions between 2002 and 2025.

Our results show a strong relationship between the tone of the Bank’s press releases and changes in its policy interest rate (Chart 1). Specifically, the tone score tends to rise when the Bank is tightening monetary policy and fall when the Bank is easing policy.

Dealer tone shifts after policy announcements

We apply the same approach to commentaries written by Canadian primary-dealer economists in the Government of Canada bond market. Specifically, we assess the commentaries that are released before and after each policy rate announcement.

Commentaries published in the days leading up to an announcement present each dealer’s view of the outlook and their expectations about the policy decision. After the announcement, dealers often publish commentaries with their interpretations of both the decision and the Bank’s messaging. A before‑and‑after comparison allows us to track how the tone of these commentaries changes.

The results of this tracking are shown in Chart 2. Each dot in the chart represents a policy announcement between September 2020 and December 2025. For each announcement, we average the tone score of all dealers.

• The horizontal axis shows how much the tone in the Bank’s press release for a policy announcement deviates from the average tone in the commentaries that dealers publish before an announcement. Positive values indicate that the tone of the Bank’s communication is more hawkish than that of dealers.
• The vertical axis shows the difference in the tone of dealers’ commentaries before and after a policy announcement. Positive values mean that dealers have, on average, revised their commentaries toward a more hawkish tone.

The pattern of the dots slopes upward, meaning that after a policy interest rate announcement, dealers generally tend to adjust their tone in the direction of the tone used in the Bank’s related press release. So, if the Bank’s tone is more hawkish than the dealers’ pre‑announcement tone, the dealers’ post‑announcement tone is likely to shift and become more hawkish (Chart 2, quadrant 1). We find the same for a more dovish tone (Chart 2, quadrant 3).

All of this suggests that dealers extract new information about the economy from the Bank’s communications that shapes their views of the Bank’s policy stance.

Releases of economic data between policy announcements lead to shifts in dealer tone  

The tone of dealers’ commentaries also shifts in between the Bank’s policy announcement dates. These shifts occur when dealers react to new releases of data for major economic indicators and update the analyses they provide to their clients.

We know this because we track how much the average tone of commentaries changes after official data releases from Statistics Canada. We find that changes in tone are most strongly linked to releases about the consumer price index (CPI) and less so for data about the labour market or gross domestic product (GDP). Regression results show that, across dealers, the median coefficient for the tone of dealer commentaries about the CPI is about 1.5 times larger than that for labour market releases and about 3.0 times larger than that for GDP releases.

These findings illustrate how our tone measure can identify when and why market interpretations shift.

Tone matters

Clear and consistent communication is a cornerstone of effective monetary policy. It helps markets and households understand a central bank’s view of the economy and reasons for its policy decisions. Such transparency can reduce economic uncertainty, which in turn promotes economic and financial stability.

This new measure helps us understand whether the Bank’s communications are clear and understood by market participants. And our findings suggest they are.

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