A preview on how Bank of Canada makes its monetary policy (and some similarities with RBI)

A nice speech by John Murray Deputy Governor of the Bank of Canada on the same.

First, BoC came up with Fixed Announcement Dates (FADs) in 2000 which led to  fixed and pre-announced schedule for its interest rate decisions. BoC organises 8 MPCs in a year:

In order to avoid these problems and render the process more predictable, the Bank moved to a system of fixed announcement dates (FADs). It now makes its interest rate decisions on eight pre-announced dates through the year, with a six- to seven-week interval between each one. In exceptional circumstances, however, the Bank reserves the right to change rates on dates that fall outside this schedule. The only two occasions when this has occurred over the past 12 years were on 17 September 2001, following the terrorist attacks on the United States, and on 8 October 2008, as part of a synchronized policy easing with other central banks.

The timing of the FADs corresponds to the release of key economic information used for the Bank’s forecasting and monitoring exercises. Four of the FADs occur shortly after the publication of the quarterly National Accounts, which report on Canada’s gross domestic product (GDP) and its various subcomponents. The other four FADs are situated midway between these dates and are also timed to coincide with the availability of important information.

This is pretty much like the RBI. RBI has four main mon pol reviews but I doubt whether they are structured around any eco data as such. It is generally in the month after each quarter ending- April, Jul, Oct and Jan. And the four mid quarter reviews are situated midway between each of the four reviews. So you have four main quarterly reviews and four mid-quarter reviews.

Who are the players in mon policy decisions ?

The major players in the FAD process are the Governing Council, the Monetary Policy Review Committee, and the four economics departments at the Bank.

Starting from the top, the Governing Council, which is responsible for making the interest rate decision, is comprised of the Governor, the Senior Deputy Governor and four Deputy Governors. The Monetary Policy Review Committee, which plays an important role in the discussions leading up to the decision, includes the Governing Council plus five to six advisers—often supplemented with one or two special advisers—as well as chiefs from the four economics departments, representatives from the Montréal and Toronto regional offices, and certain other senior personnel.

The four economics departments are: Canadian Economic Analysis (CEA), International Economic Analysis (INT), Financial Stability (FSD) and Financial Markets (FMD). Most of these titles are self-explanatory, but I’ll note that the Financial Stability Department focuses largely on the activities of Canadian and foreign financial institutions, while the Financial Markets Department concentrates on domestic and foreign financial markets.

The decision on mon pol is a five stage process:

Stage 1—the presentation of the staff projection to the Governing Council—occurs three weeks prior to the interest rate decision and has at its centre the Bank’s latest forecasting and policy simulation model, ToTEM2

Unlike Stage 1—the presentation of the staff projection—which mainly involves the Canadian Economic Analysis Department and the International Department, Stage 2 draws importantly on all four economics departments. T

Stage 3—the policy recommendations of staff—typically occurs on Friday, two days after the major briefing. A senior member of the Canadian Economic Analysis Department or the International Department is asked to summarize and update the material that has been presented in Stages 1 and 2, and to provide a recommendation regarding any policy action that should be taken.

Stage 4—the decision by the Governing Council—begins on Friday afternoon, immediately after the Stage 3 discussions, and resumes on the following Monday. Members of the Governing Council are the policy decision-makers. T

The fifth and final Stage of the process—Communication—focuses on the publication of the press release at 9:00 a.m. on Tuesday announcing the Bank’s decision and explaining the reasons behind it. Four times a year, this message is reinforced and expanded upon with the release of a Monetary Policy Report one day later. The Report provides a more detailed account of Canadian and global economic developments, the Bank’s projections, and the major upside and downside risks that could affect the inflation outlook.

Again, we have similar things in RBI. RBI releases a macro and mon development report before the policy in the main four reviews. And RBI Governor addresses public/press in the four main reviews. In the mid-quarter reviews, just a press statement is released giving a brief on economy and its decision.

Interesting to note the parallels between RBI and BoC as far as RBI’s Mon Policy meeting are concerned. Here is a bit more:

  • RBI like ECB is one of the few central banks which still looks at monetary trends for mon policy decisions. However unlike ECB which stresses on its monetary pillar, RBI just mentions monetary aggregates as broad indicators.
  • RBI does not have a Mon Policy Committee like other central banks. However, it has a Technical Advisory Committee which is an advisory body formed to help RBI Governor. There were some recent changes which makes RBI’s TAC look like FOMC.
  • Then I learnt from this paper, that ECB relies more on Repo for increasing reserve money.  Repos will be reversed whenever they expire…BoE and Fed on the other hand have relied on QE using OMOs where they buy assets but there is no time period as such. Only when Fed and BoE press the exit button and sell the assets will there be a reversal. RBI does a bit of both – Repo and OMO to create reserve money as shown in this paper.

It is always interesting to compare central banking frameworks. How they go about achieving their objectives which could be both similar and different to other central banks…

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