By Randall Palmer
WASHINGTON (Reuters) - The Bank of Canada intends generally to abandon guidance on the direction of interest rates because doing so will lead to less volatility in normal times and less market parsing of the central bank's statements, Governor Stephen Poloz told Reuters.
Poloz was speaking in conjunction with the release on Friday of a paper on integrating uncertainty into monetary policymaking, the first he has written since taking over as head of the Bank of Canada last year.
His remarks, less than two weeks before the central bank releases its quarterly Monetary Policy Report and next rate statement, came as markets debate whether Poloz will give up the neutral stance as to direction and timing of the next rate move.
No one expects a change in the central bank's 1 percent overnight lending rate on Oct. 22, but markets are looking carefully at the language used.
It was not certain from his remarks when Poloz would drop the word "neutral" from the bank's rate statements, but he made clear he did not intend in the future to return to explicit mentioning of a tightening or easing bias.
In his paper, he wrote: "It is my belief that forward guidance should be seen as a useful tool in the central banker's kit, but one that should be reserved primarily for use at the zero lower bound, as a form of additional insurance that the economy will return to equilibrium."
The zero lower bound occurs when the central bank cannot cut its reference rate because it is at or near zero, a situation which prompted the Bank of Canada in April 2009 to pledge to keep the rate on hold through the second quarter of 2010.
The bank has called this "extraordinary forward guidance," but Poloz also referred to dropping the less extraordinary kind of forward guidance used by his predecessor, Mark Carney, in early 2013 - language which said some modest withdrawal of stimulus would be needed after a period of time.
Poloz said the language had to be dropped after the economic recovery did not unfold as expected.
"The problem with having given the ultimate conclusion is it's very difficult to unwind it. You end up explaining every little detail in order to maintain it," he told Reuters on the sidelines of the International Monetary Fund and World Bank fall meetings in Washington.
"It's like the market's just got to have a steady feed of nuanced tweaking of words, and it's hanging on every word."
He said a healthier market would result from the central bank laying out all the considerations of where it sees the economy and letting markets draw conclusions about rates.
Asked if he would give a signal if it became clear rates were imminently going to rise, he said: "No, because the market will know."
On the issue of taking the word "neutral" out of future rate statements, he said: "I don't know that. But you know, we actually had to say that clearly, because I think that was all part of being trapped in a forward-guidance mindset. Lots of central banks are in it, of course."
He insisted there was an equal chance the Canadian central bank's next move would be a cut or hike, though economists polled by Reuters all expect an eventual hike.
Though Poloz does not want to give explicit guidance on the timing of a possible rate hike, he did point to extensive slack in Canada's labor market, with high rates of youth unemployment and part-time employment and many workers forced to retire.
"We don't really know for sure how much excess labor supply there is, but there is quite a bit, and that's the ultimate supply variable for us," he said.
"It feels like we have quite a ways to go (before the excess labor supply is exhausted)."
He spoke to Reuters before the release of Canadian employment data on Friday, which showed the country added significantly more jobs than expected in September and the unemployment rate fell to near a six-year low of 6.8 percent. [ID:nL2N0S414M]
In his paper, Poloz said one problem with forward guidance was the market could make a one-way bet, leading to the possibility of significant volatility when the bank changes its guidance.
Another problem is it can create a fragile equilibrium with the markets addicted to the guidance and to any new caveats that might be added, he said.
Poloz acknowledged there were concerns of slippage around the central bank's inflation target, and that the projected return to the target had been pushed out several times.
"But, provided that inflation expectations continue to be well-anchored, and the bank is aiming to hit the 2 percent target over a reasonable time frame, it is sensible to remain flexible about the actual speed of reconvergence to the target," he wrote.
(Editing by Paul Simao)