The Bank of Canada may become more explicit in detailing its assessment of the outlook for monetary policy. The trick is determining how to do it right, suggests Deputy Governor Sheryl Kennedy.

Speaking to l’Association des femmes en finance du Québec in Montreal today, Kennedy tackled the topic of transparency in monetary policy. But she didn’t give any new clues as to the bank’s next rate decision, which is due on January 22.

Kennedy notes that the bank’s last rate-setting decision reflected its view that downside risks prevailed. “Global financial market difficulties had worsened, tightening credit conditions further, and there was an increased risk to the prospects for the demand for Canadian exports, since the outlook for the U.S. economy had weakened further,” she says.

Looking ahead to its next interest rate announcement, and the Monetary Policy Report Update two days later, Kennedy says that the Bank of Canada is preparing its regular quarterly economic projection and risk assessments, “so that we can fully assess the implications of all economic and financial developments since the October Report, and set the appropriate course for monetary policy.”

Beyond the next rate decision and policy report, she suggests that the bank may start to be more expansive in giving its views on the economic outlook. “Disclosing more of the Bank’s assessment about the outlook, including forward-looking statements about monetary policy actions, is particularly tricky and really tests the limits of transparency. Nevertheless, it is in this area that there may be the most room to increase transparency,” she says.

However, she cautions that first the Bank has to figure out if it would be beneficial to provide more information. And, if so, how should it communicate that information. “At the Bank of Canada, we do not believe in constructive ambiguity, nor in saturating the market with a lot of information that has no clear message. Real transparency involves judgment: communicating what is important, what clarifies, and not what obscures,” she says.

She suggests that there are several ways the Bank of Canada might consider providing more transparency about the risks and uncertainties around its base-case projections. “Some central banks use fan charts showing confidence intervals that can suggest the extent of uncertainty around a particular factor in the overall forecast. Another approach is to publish complete alternative scenarios in addition to presenting a base-case projection. And some academics have called for more transparency by sharing the monetary authorities’ probability estimates of different risks. Examining some of these possibilities is in our work plan for the year ahead,” Kennedy notes.

What it won’t do, she adds, is start using stock words and phrases to signal policy intentions. “Instead, we try to spell out the situation as we see it,” she says, adding that it also pays attention to the work of market watchers outside the bank. “If our views differ substantially from the consensus of external observers, we might consider either redoing our own analysis, seeking out further information, or communicating more explicitly our views and analysis to help those observers to understand the factors that we consider to be important. As I have said on many occasions, if you are considering placing a bet between what you think we said we were going to do and what you think we ought to do, I’d go with the latter,” she counsels.