BoC’s commitment to data-based interest-rate policy a welcome shift

“The Bank’s two calculated output-gap indicators remained negative at the end of the third quarter of 2022 (-2.1 and -0.4 percent),” they said.

While there was a need to deviate from that forward guidance, doing so jeopardizes the tool’s credibility, which the two said might have been part of the reason why the BoC held off on hiking rates.

There are similar risks as interest rates increase on the tightening side, they added, as excessive forward guidance prompts excessive dampening economic activity dampening. The central bank’s pledge to rely more heavily on data, the two argued, is even more appropriate given its signals of an expected end to the tightening cycle.

“It is true that headline inflation still looks stubbornly high, at 6.8 percent in November,” they said. “On the other hand, as we have previously pointed out, the built-in inertia of this metric does not readily reflect the current situation, which is actually starting to look better.”

Aside from committing to a greater data focus, Ambler and Kronick urged the central bank to fixate less on headline inflation, and instead “use the more telling measures that exist.”

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