Introducing the Bank of Canada’s Market Participants Survey

Rapid changes in the macroeconomic environment, in financial sector innovation and in the market landscape all underscore the need for central banks to regularly interact with a diverse set of stakeholders. Obtaining real-time perspectives is a key component of market intelligence. Central banks gather this information, which is primarily qualitative, through direct engagement with business leaders and market participants (see Box 1). In recent years, many central banks have introduced market participant surveys to gather more structured feedback on a defined set of topics. These surveys complement macroeconomic and market data and model-based insights, which can all be imperfect and come with lags.1

The most recent addition to the Bank of Canada’s set of stakeholder surveys2 is the Market Participants Survey (MPS). The MPS engages a diverse set of participants in financial markets and gathers their views on key macroeconomic and financial variables as well as monetary policy. Bank staff conduct the MPS every quarter to gather timely information in a structured and systematic way and to enhance their monetary policy analysis and advice to Governing Council. MPS results help staff understand how market participants form their expectations and may also, over time, provide useful insights about the effectiveness of the Bank’s communication efforts and its monetary policy.

The pilot phase of the MPS began in 2019. The survey will soon be a permanent part of the Bank’s tool kit. The Bank will publish results regularly, beginning shortly after publication of the January 2023 Monetary Policy Report.

This note describes the MPS’s objectives and main features, its process and design, and how staff use the results.

Objectives and main features

The Bank routinely incorporates the analysis of financial market conditions into its monetary policy decision-making process. Market monitoring is an important component of this analysis and includes both private sector forecasts and market pricing. But these data come with some caveats:

• Surveys of professional forecasters are readily available but may be challenging to interpret because different models underlie the results. In addition, often these forecasts are available only close to the fixed announcement dates of the Bank’s monetary policy decisions and are therefore less useful for the analysis that staff complete beforehand.
• Most market pricing data provide point estimates only, which represent the mean of expectations. In addition, smaller countries like Canada are influenced by global factors and have some market segments that are less liquid, so changes in market pricing need to be interpreted with caution. This is particularly true during periods of uncertainty.

Given these challenges, market liaison activities are a good complement to market monitoring, providing additional context and forward-looking views and even challenging what the data appear to show.5 But much of the captured information is qualitative in nature, so it can be subject to interpretation and bias (e.g., participants “talking their book”—promoting their own views) or be unbalanced, reflecting only a particular subset of views.

To bridge the gap between market monitoring data and market liaison activities, Bank staff decided to follow the approach of other Bank surveys and develop a regular, structured method to assess market expectations. The MPS enables staff to routinely collect standardized information from a representative and diverse sample of financial market participants. This way Bank staff can minimize bias in the data and gradually establish a time series suited for long-term quantitative analyses. As well, open-ended questions allow respondents to provide further qualitative information in their responses. Together, the two response types serve as a basis for follow-up interviews with participants. These interviews allow Bank staff to clarify (if necessary) some of the responses and, more importantly, to obtain additional insight into the factors underlying participants’ macroeconomic and monetary policy forecasts and related risks. When combined, the quantitative and qualitative information provides a more complete assessment of expectations.

Since the MPS’s pilot phase in 2019, the:

• survey sample has expanded
• questionnaire has been refined and adapted to the changing environment
• data infrastructure and governance processes have improved

Process and design

The MPS has two components—a questionnaire sent to all respondents and follow-up interviews conducted with a subgroup of respondents (see Box 2 for more details). The questionnaire asks respondents for their views on the macroeconomic outlook and the expected path of monetary policy for both Canada and the United States, as well as their expectations for key financial variables. Although some information about market participants’ expectations can be derived from market prices, private sector forecasts and other surveys, the MPS is designed to offer additional benefits, such as:

• Timeliness
  • The MPS cycle is aligned with that of the Bank’s internal cycle for the Monetary Policy Report. This allows the MPS results to be included in staff analysis and advice to Governing Council for its monetary policy decisions (see Figure 1).
• More complete information
  • The MPS allows for the exploration of additional market or macroeconomic variables relative to private sector forecasts. This provides data points that cannot be derived from market pricing and enables the inclusion of additional time horizons in survey questions.
  • The MPS also derives a fuller set of estimates—including means, medians and, in some cases, full probability distributions of responses.
  • The MPS uses a more representative sample than other surveys, including both sell-side (banks, securities dealers) and buy-side (pension funds, insurance companies, asset managers) participants.
• Regular touch points with a broad set of market participants
  • The follow-up interviews are a valuable way to validate and help contextualize questionnaire responses. Conversations with panelists are crucial, particularly when the economic environment is changing rapidly.
• Flexibility and continuous improvement as needed
  • While the MPS questions are intended to remain stable over time, Bank staff have the flexibility to add special questions if necessary.

See Box 3 for a comparison of the MPS with other central bank surveys.

Figure 1: The quarterly process for the Market Participants Survey

Figure 1: The quarterly process for the Market Participants Survey

* The first publication of MPS results is scheduled approximately two weeks after the release of the January 2023 MPR.
Note: MPR is the Monetary Policy Report.

Throughout the pilot phase of the MPS, the survey sample was expanded. The current set of 30 participants have been selected based on the following general criteria:

• Relevance of expertise—Participants are senior economists or strategists involved in the areas addressed in the survey. However, survey responses are interpreted as not necessarily representing the view of the respondent’s organization, because not all participating institutions have public or firm-level forecasts. In some cases, people from different areas of an institution have different views (e.g., depending on the institution’s organizational structure, a commercial bank senior economist, an asset-management senior economist and a broker-dealer senior economist—all from the same institution—may have different forecasts and offer different perspectives).
• Representativeness—The sample selection ensures the collection of a diverse set of opinions across institution types (see Chart 1).
• Commitment to participate regularly in the survey—Participants are from institutions that are often involved in market intelligence activities. While participation in the MPS is voluntary, Bank staff work to ensure a high response rate and stability in the sample of respondents over time to maintain the quality of results.

Survey governance

The Bank carefully considered the risks associated with conducting the MPS and publishing its results and has put important safeguards in place:

• The MPS is strictly a staff initiative. The Bank’s Governing Council is not involved in administering the survey or formulating the questions. This is to limit any risk of the MPS being perceived as a signal of Governing Council’s views.
• The panel composition and interview process ensure that staff collect diverse and well-informed perspectives. This mitigates the risk of the data collected, and the resulting analysis, being unbalanced or too narrowly focused on a small number of individuals or certain types of institutions.
• Before inclusion in the MPS, the questionnaire and themes for the follow-up interviews are discussed with and approved by senior management in the Bank’s Financial Markets Department. This ensures that the questionnaire and interview themes are presented in a neutral manner and that the discussions with participants are based on information that is available to all market participants. Interviews are also completed before the start of the Bank’s blackout period to avoid any perception that the questions asked may signal Governing Council’s views or that respondents are receiving privileged access to the Bank during this period.6
• The Bank handles privileged information received from participants, such as their macroeconomic projections, in accordance with its information security and privacy policies as well as its Code of Business Conduct and Ethics.

Before the MPS design was finalized, an independent review of survey quality was conducted by other Bank staff not involved in the creation of the MPS. The review was based on a list of criteria (e.g., simplicity and meaningfulness of questions, consistency with other Bank of Canada or central bank surveys, and minimization of signalling risk). It resulted in some adjustments to the MPS, such as refining questions or removing those that had a consistently lower response rate.

The survey questions are not likely to change often. New questions or changes to existing questions will be made only in the context of important shifts in the macroeconomic environment. Similarly, the panel composition will be reviewed annually, with the goal of keeping participants engaged and to maintain the quality of survey results. This periodic review will also allow for the addition of new participants to ensure a representative and diverse sample of respondents.

Use of Market Participants Survey results

Broadly speaking, the MPS informs many aspects of Bank staff’s monetary policy analysis and advice to Governing Council. The timing of the MPS (as illustrated in Figure 1) aligns with the staff analysis process and internal deliberations. The Financial Markets Department presents the MPS results as part of staff’s final policy recommendations that inform Governing Council’s views on the expectations of financial market participants. These results are summarized and presented as part of the tactical and communications advice provided for the upcoming decision. As the survey matures, the results may be used in other public communications, such as speeches. As well, the quantitative data will, over time, enable or support some of the Bank’s long-term research.

As noted above, survey data complement market-based indicators and other surveys. But specific MPS questions add to the Bank’s understanding of market conditions and market sentiment in three ways.

First, some MPS questions generate a distribution of responses rather than single point estimates (see Chart 2 for an example). This is particularly relevant for smaller countries like Canada. Local markets are sometimes less liquid or have fewer available market-based indicators to derive probability distributions from. This makes it more difficult to extract meaningful information from market price data alone. As well, the distributions are more relevant during periods of high uncertainty.

Second, some MPS questions capture quantitative data points that are not available in market price data or, if they are available, the information is difficult to standardize and aggregate. This includes MPS questions about risks to participants’ outlooks, the risk of a recession, and previous survey questions about the estimated size of the Bank’s balance sheet.

• For example, during the Bank’s quantitative easing program, MPS participants were asked to estimate what size the Bank’s balance sheet would be at different points in time. This allowed Bank staff to gauge respondents’ expectations for the total amount of asset purchases made by the Bank and to infer how long participants anticipated the program would last.
• As another example, Chart 3 shows the results from a recent addition to the questionnaire that measures participants’ expectations for a recession.
• The flexibility of the MPS allows Bank staff to add or remove questions depending on current circumstances. The balance sheet estimate question first appeared in the October 2020 MPS and was discontinued in June 2022, a few months after the Bank ended quantitative easing and entered the reinvestment period.

Third, the MPS follow-up interviews with market participants allow Bank staff to gather additional qualitative information to supplement the survey-based data. For example, Chart 4 shows how a given distribution of results can be compared with market data but still be in need of further discussion to understand the motivations and biases behind those results. Interviews allow staff to further explore the drivers of and shifts in expectations for the interest rate path and risks around the base case scenarios.

MPS respondents have also highlighted the benefits of both the questionnaire and the follow-up interviews. The interviews offer an opportunity for two-way dialogue on pressing issues related to economic developments, allowing participants to more clearly communicate their views to Bank staff and provide feedback on the Bank’s communications. Published results will offer market participants a way to benchmark their analyses and views against a broad and representative sample of their peers.

Of course, as with the information collected through market liaison activities, challenges do exist in interpreting these data. One such challenge is the timing of when results are collected. Given the resource implications and timing of Bank staff analysis, the survey is conducted several weeks before the Bank’s monetary policy decision announcement. Since market participants update their forecasts and expectations closer to the time of the announcement date or around key data releases, the survey responses may not reflect respondents’ final views as they assess new data releases. Another challenge is the ambiguity of whether expectations around monetary policy indicate what market participants think central banks should do or what they will do. In light of both of these challenges, the post-survey interviews and other market liaison activities help ensure that staff analysis is robust.

Despite these caveats, Bank staff have found the MPS to be a valuable addition to the Bank’s market intelligence tool kit and internal market analysis. The MPS yields important qualitative insights and quantitative data that are not available in market pricing data. This improves the quality of staff analysis for monetary policy decision making and further strengthens relationships with market participants. Beginning in January 2023, the Bank will publicly release MPS results on Canadian expectations on a quarterly basis. This further enhances the Bank’s transparency and, in turn, provides helpful information to the broader public.

Endnotes

Acknowledgements

This work draws on previously unpublished and past work by Monica Jain, Joanna Roberts and Zabiullah Tarshi. The authors thank Stephane Lavoie, Virginie Traclet, Jeremy Harrison and Wendy Chan for comments and feedback.