An inside look at how the Bank of Canada makes its interest rate decisions

Deputy governor Nicolas Vincent lays out the steps that begin a month before the central bank's next scheduled announcement

In an effort to give the public a better understanding of how it makes its policy rate decisions, the Bank of Canada is giving an inside look into the process. In a speech before the Sherbrooke Chamber of Commerce on Thursday, Bank of Canada deputy governor Nicolas Vincent laid out the steps the central bank goes through before reaching a decision. “We are fully conscious of the responsibilities the bank has toward all Canadians,” Vincent said. “To maintain the public’s trust, we must be rigorous, professional, humble, honest and transparent.” Here’s a breakdown of the process, according to Vincent’s speech.

Case A and Case B

Vincent said the decision-making process begins a month before the announcement, when bank staff present an economic projection to the six members of the governing council. This is referred to as “Case A” and is based on the bank’s macroeconomic models and surveys. “Since we don’t have a crystal ball, we draw on the latest data and use our projection models to look into the future,” Vincent said. “For several hours, governing council members debate the assumptions and risks to the projection as well as alternative case scenarios prepared by staff.” Ten days later, bank advisors and economists present “Case B,” which incorporates any new data that has been released and comments from the members of the governing council.

Risks and recommendations

The third step is the risk and recommendations meeting, which takes place one week before the policy decision announcement. This is where advisors and staff debate raising, maintaining or cutting the policy rate. “This culminates in a round-table discussion where each person puts forward a recommendation and its rationale,” Vincent said. “As you can imagine, we are never short on opinions.”

Reaching consensus

The final and most important step is when the governing council deliberates the decision. The deliberations take place in what’s called the Rasminsky Room, named after Louis Rasminsky, the central bank’s third governor. “It’s a secure room where the blinds are always drawn, and access is controlled,” said Vincent. “From inside this room, no communication with the outside world is allowed, the use of electronic devices is strictly regulated.” The governor of the bank chairs the meeting and every member goes around the table to provide their views on the outlook for growth and inflation. A second round of discussions happens, where members debate the rate decision. Vincent notes unlike the United States Federal Reserve and the Bank of England, members do not vote on a decision, but must instead achieve a consensus. “In my opinion, the need to arrive at a consensus strengthens our decision-making process,” Vincent said.

Vincent said he felt the weight of the responsibility of his role a few months into the job, during deliberations in June 2023, when the governing council decided to raise interest rates again after data showed inflation increased slightly after the economy had been more robust than expected. “I came to understand that I was one of six people whose decision would directly impact borrowing costs for millions of people like you and businesses like yours,” he said. “Believe me when I say the realization made my head spin a little; it was really quite humbling.”

Going public

The final step is crafting the press release and preparing for the press conference, so the bank can explain its decision. Vincent noted that the bank’s credibility must consistently be earned. “Even when those actions are difficult and have direct impacts, Canadians understand that we are always guided by our resolve to keep inflation low, stable and predictable,” he said.

• Email: jgowling@postmedia.com

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