A Bank of Canada internal review found that the extraordinary measures it took during the pandemic could have been communicated more clearly, including an explanation of how its actions would be eased after a crisis has passed.
The report also noted that the bank significantly underestimated the strength and persistence of inflation in 2021 and early 2022, something governor Tiff Macklem has previously acknowledged.
Macklem said the review will help the central bank be better prepared and more effective should Canada face another similar economic crisis.
“The Bank of Canada is a learning institution, and we must take on board the lessons from this unprecedented experience,” Macklem said in a news release.
In addition to slashing its key interest rate to 0.25 per cent in the early days of the pandemic, the Bank of Canada bought billions worth of bonds. At first, the purchases were designed to keep financial markets functioning. Later, the purpose was to provide monetary stimulus.
The review says the bank could clearer about the limited circumstances under which it would make such large-scale asset purchases and better distinguish between when it is intended to restore market functioning and when it’s a stimulus measure.
In response to the review, the central bank also said it should continually and clearly communicate the conditions under which extraordinary forward guidance on the path for interest rates would be ended if uses it in the future.
The future the conditions of extraordinary forward guidance could be more clearly tied to the inflation outlook and emphasized more often, it also said.
Bank did not fully anticipate supply-demand pressures
The review says several factors contributed to inflation 2021 and 2022, including the unique impacts related to the pandemic as well as Russia’s invasion of Ukraine as well as changes in consumer spending patterns and higher-than-usual pass-through of costs to prices.
The bank did not fully anticipate the speed of the rebound in demand relative to supply, the report said.
“Another contributing factor was a notable rise in the share of cost increases that firms passed on to consumer prices,” the report said.
“With strong demand and limited supply, firms may have been less concerned about losing customers, leading to greater pass-through of costs.”
However, the bank said its analysis indicated that its policy actions did not on their own push inflation significantly about two per cent.
An external review of the bank’s report by a panel of experts including former Bank of Spain governor Pablo Hernandez de Cos, professor Kristin Forbes of MIT’s Sloan School of Management and University of Calgary professor Trevor Tombe agreed on the need to improve communication and transparency, particularly around the use of unconventional tools.
“All in all, there are a number of ways by which the bank could continue to refine and explore accessible methods to communicate its policy decisions,” the external review said.
“This is particularly important for the new and unconventional tools which were introduced in exceptional circumstances, but which may need to be relied upon again.”