The C.D. Howe Institute recommends that the Bank of Canada begin publishing an interest rate forecast as part of a broader overhaul of how the central bank communicates inflation policy to the public. This suggestion comes amid concerns that current metrics, particularly core inflation, are confusing and disconnected from Canadians' lived experiences.
Proposal for Clearer Communication
In a report released in mid-June, C.D. Howe fellows Steve Ambler, Jeremy Kronick, and Thorsten Koeppl argued that the Bank of Canada should provide a projected path for its policy rate over the next six to eight quarters. "One thing we suggest, which the bank does not do, and I think they’ve been reluctant to do, is how they’re getting inflation back to target depends on what they think their own policy rate is going to be doing," said Ambler, a fellow-in-residence at the think tank. The authors believe this would help Canadians understand the central bank's strategy for achieving its 2% inflation target.
Core Inflation Confusion
The report primarily focused on the Bank of Canada's reliance on core inflation measures, which exclude volatile items like food and energy. According to the authors, "Their analytical complexity brings up concerns that people will find the measures out of touch with their inflation experience." For instance, while core inflation in May remained near the 2% target, the overall consumer price index (CPI) rose to 3.2%, driven by a 33% year-over-year increase in gas prices and a 4.3% rise in grocery prices—hitting household budgets hard.
To address this, the report recommends that policymakers focus communications on headline CPI and its projected trajectory over eight quarters, alongside an interest rate forecast showing how rates would steer inflation in the desired direction. This shift, they argue, would make monetary policy more transparent and relatable.
Risks of Publishing Rate Forecasts
The authors acknowledged potential drawbacks, such as the forecast being misinterpreted as an unconditional commitment. "It could be interpreted as an unconditional commitment to following the predicted interest rate path," they wrote, adding that deviations could harm the central bank's credibility. However, they emphasized that "the solution to all these problems is clearer communication." Ambler stressed that the forecast should be clearly presented as a projection subject to uncertainty.
Such practices are not unprecedented. The Swedish Riksbank and the Norges Bank of Norway already publish interest rate forecasts, providing a model for the Bank of Canada.
Stakeholder Feedback Aligns
On Thursday, the Bank of Canada released a 54-page report echoing some of C.D. Howe's observations. Based on discussions with 30 stakeholders—including academics, think tanks, business groups, unions, and private-sector economists—and 198 Canadians across 11 cities, the report found widespread concern about the cost of living. Many participants indicated that CPI does not reflect their personal experiences, reinforcing the need for clearer, more accessible inflation communication.
