Q&A

A smooth FX forecast re-launch foreseen — Q&A with Czech central bank expert

The Czech National Bank has long been seen within the central banking community, and in markets at large, as a prime example of an inflation targeting central bank using consistent macroeconomic forecasts to guide expectations. Gradually increasing transparency and developing elaborate communications has been critical to broadening understanding and gaining credibility for its forecasts, and policy. By 2009, the CNB had completely opened up and provided full forecast transparency, publishing not only the projections of inflation and other key economic variables but also the forecast-consistent trajectories of interest rates and the exchange rate.

It was not a smooth sailing all along, and — in an exceptional move for one of the world’s most transparent central banks — the CNB cut back on transparency and ceased the publication of the FX path in 2014. By removing the FX path from the public domain the Czechs defied the argument that when a central bank opens up, there is no way back. Sure, each incremental step in increasing transparency needs to be carefully thought through. Still, I cannot help but conclude that the Czech example seems to be proving that there indeed is a revolving door for transparency to go back and forth under certain circumstances — a case illustrated by the CNB’s readiness to re-publish the exchange rate forecast from February 2018.

Jan Filáček © CNB

Jan Filáček © CNB

With that in mind, I asked Jan Filáček, my former colleague from the Czech National Bank who recently represented the Bank at the European Central Bank’s communications conference, to evaluate the Czech experience in gradually increasing economic and policy transparency. As Deputy Director of Monetary Policy and Fiscal Analyses Division at the CNB’s Monetary Policy Department, Jan has long been involved in designing the CNB’s transparency and policy communications practices. This post is another in a series of Q&As on central banks' transparency and communications that I keep running on Lombard-Rates.com.

The Czech National Bank has followed a gradual approach to increasing economic and policy transparency. In 2002, it first published a model-based unconditional medium-term projection of inflation, while providing only verbal comments about future movements in interest rates. What were the most important lessons learned at the beginning of this process of gradually opening up?

The process of increasing central bank transparency is gradual by its nature. It is similar to a child growing up. The kid needs to start with small steps before being able to run. After each improvement, a central bank has to evaluate the outcome and carefully analyze whether the observed benefits have indeed exceeded the costs. Also, central bankers have to get used to each newly introduced communication tool in order to use it properly. In the same vein, the audience – financial analysts, journalists, and broad public – are only gradually becoming accustomed to novel ways of central bank communication.

As you mentioned, we started using the so-called unconditional forecast in July 2002. Before that, the CNB assumed that interest rates will remain stable on the whole forecast horizon. This unrealistic assumption was therefore replaced by the so-called reaction function. This function captures the observed behavior of the CNB, which reacts to forecasted economic developments by changing its instrument, the 2-week repo rate. This very short-term interest rate consequently transmits to market interest rates, proxied in the model by 3-month PRIBOR rate.

The trajectory of 3M PRIBOR rate consistent with the forecast was initially made public in a qualitative manner only, i.e. future interest rate movements were described verbally. The decision not to publish the numerical trajectory of interest rates was then driven by our fears that the published trajectory might be perceived as our commitment to future interest rate changes and that the market might over-react to such communication.

Since 2002 we have continuously educated the public by revealing the assumptions, risks, and uncertainties surrounding each forecast, emphasizing that new information on the domestic and global economy obtained after the forecast is drawn up can change the interest rate outlook. We also stress the fact that the forecast is prepared by staff members, and the Bank Board does not necessarily have to agree with the forecast on each occasion.

The CNB was the first emerging market IT central bank to reveal a forward path for interest rates as a signal regarding future policy. What were the pros and cons of this move weighed at that time?

At the beginning of 2007, only two central banks in the world were disclosing their interest rate forecast – the Reserve Bank of New Zealand and Norges Bank. Sveriges Riksbank started revealing interest rate forecasts in February 2007, while a few others (Bank of England, European Central Bank) were using market expectations as a proxy for future monetary policy decisions. Therefore, the foreign experience was rather limited and only partially relevant for the Czech economy, which was still catching up with the developed economies and had a relatively less advanced financial market.

Only in late 2007, five years after the release of the first unconditional forecast did the Board decide that the CNB could fully reap the benefits of going public with a numerical trajectory of interest rates while avoiding potential pitfalls. The first interest rate path was published in February 2008.

The main benefits of publishing the interest rate forecast were considered to be the greater predictability of the CNB’s decisions and enhanced understanding among financial professionals of how the CNB reacts to different types of shocks. Greater predictability should result in the increased impact of monetary policy decisions on longer-term interest rates, the lower volatility of long-term interest rates, and a decline in risk premia.

The major risk was that the interest rate trajectory could be misinterpreted as an unconditional commitment from the Board. Then, the CNB would risk its credibility as, sooner or later, its decisions would deviate from the trajectory. Even if professionals did not perceive the trajectory as a commitment, they could place too much weight on the information contained in it and rely less on their own analysis, which in the end could potentially impair the quality of their financial decisions and recommendations.

However, the risk of commitment illusion has been successfully reduced by extensive communication, and by stressing the uncertainties and assumptions of the forecasts. The uncertainty of key variables has been quantified using past forecasting errors and published in the form of fan charts.

How do you in retrospect evaluate the experience with publishing the IR path?

So far, I see the experience as very positive and in line with our expectations. After each board meeting, we closely monitor the reaction of forward interest rates to the decision and communication of the CNB. Since the CNB started publishing interest rates, the market reaction has been consistent with our intuition. In situations of no alternative presented and neutral balance of risks as seen by the board members, the forward rates tend to converge towards the forecast-consistent interest rates. However, if the outlook is surrounded by higher-than-usual uncertainty, as captured in an alternative scenario or risks identified by the Board, the forward interest rates tend to react much less.

In 2009, the CNB made another important transparency move: It started publishing model-based unconditional staff projection of the exchange rate to provide a complete set of information for forecast users, using fan charts underscoring the uncertainty. Again, what were the key drivers behind this transparency initiative, and what concerns the CNB harbored at the time, before going ahead with the publication?

When we started to disclose the interest rate trajectory in early 2008, the exchange rate trajectory became the only hidden part of the CNB’s forecast. There was a good reason for a more cautious approach to the exchange rate forecast, as compared to the interest rate forecast. Publishing the exchange rate forecast potentially creates much more room for financial speculation, which could, in the end, lead to a more volatile exchange rate. This concern was strengthened by the fact that the CNB forecasts the bilateral koruna-euro exchange rate, as opposed to some other central banks that forecast and publish the nominal effective exchange rate. However, favorable one-year experience with disclosing the interest rate forecast and the obvious benefit of reaching full transparency in the CNB forecast led the Board to the decision to start publishing a numerical forecast for the koruna-euro nominal exchange rate as from early 2009. With this step, the Czech National Bank became the first central bank in the world to unveil a forecast for a nominal exchange rate vis-à-vis a specific currency.

Did the experience with the FX rate path publication prove that some of the earlier concerns about increasing transparency were rather unfounded, and if so, in what way did things turn out more positive than originally thought?

Looking at the koruna exchange rate volatility, it did not increase in 2009, or in the following years. On the contrary, volatility declined from the elevated levels seen in late 2008 and at the beginning of 2009. However, this market development was mainly driven by the global financial crisis and the fact that we started publishing the exchange rate forecast had, in comparison to this global phenomena, only a marginal effect.

Considering it was a pioneer decision, I see it as a success that we did not face any major issues, and that markets correctly incorporated this additional information. I believe that knowing the CNB’s exchange rate forecast was very helpful for private professionals in their understanding of the CNB’s forecasts and their ability to check the forecasts’ internal consistency. We organize regular quarterly meetings with private professionals and they often ask questions regarding the exchange rate forecast. When the exchange rate trajectory is published, it is also much easier for us to answer these questions.

The CNB lowered key interest rates to “technical zero” in November 2012, and with the room for rate cuts exhausted, it used the exchange rate as a tool to ease monetary policy in November 2013, intervening on the FX market to drive the crown weaker. With that decision, it cut back on transparency and ceased the publication of the FX path, an exceptional move for one of the world’s most transparent central banks. What were the considerations that led to this unconventional transparency decision?

In 2014, the CNB ceased publication of the exchange rate forecast because with the introduction of the FX commitment the forecast trajectory did not contain any useful information. In fact, the exchange rate became an exogenous assumption of the forecast, and the koruna was expected to stay close to the exchange rate floor of 27 crowns per euro. Also, the uncertainty bands were no longer relevant, as the CNB’s interventions, either potential or actual, reduced exchange rate volatility to historically low levels. For all of this, I would not call the decision unconventional, it was rather a natural decision considering the altered role of the exchange rate in the CNB’s macroeconomic forecast.

The CNB has committed to resuming the publication of the FX path in early 2018 when it publishes the new macroeconomic forecast. This would be nearly a year after it returned to “normal” monetary policy and stopped the use of the exchange rate as the tool. What led the CNB to take this long to reopen the FX outlook embedded in its forecast?

As the end of the exchange rate commitment approached, it needed to be decided when the CNB would resume publishing the exchange rate forecast. In these discussions, the key argument for the later timing of this step was that the exchange rate trajectory could be interpreted by the markets as the desired trajectory and that the confidence levels (particularly on the appreciation side) could be perceived as thresholds that would trigger CNB interventions on the FX market. Therefore, it was decided not to publish the exchange rate forecast until the monetary policy returned to “normal”, i.e. interest rates returned to levels comfortably above the zero-lower bound and the koruna exchange rate found a stable footing at a new, market-determined level.

These conditions were met in the autumn of 2017. After two hikes in August and November, and with the outlook of further tightening this year, interest rates are now relatively safely above zero. Also, the exchange rate has developed quite smoothly since the exit from the exchange rate commitment. In light of this, the Board decided at its November meeting to resume publishing the exchange rate forecast as from February.

Do you expect to face any challenges when you resume publishing the FX path? How do you prepare for that?

Personally, I do not expect any problems to arise after we return to publishing the exchange rate outlook. Of course, we need to stress at every occasion that the exchange rate path should only be seen as a model-consistent trajectory, not as a desired path or even a CNB commitment. New information obtained after the preparation of the forecast, factors not covered by the forecast and risk assessment of the Board may, and most likely will, cause the actual exchange rate to deviate from the forecast. As before, we will illustrate this uncertainty by publishing the trajectory in the form of a fan chart. The confidence levels in the exchange rate fan chart will be, like in other variables, based on the errors of past – in this case, those preceding the exchange rate commitment – CNB forecasts.


The series of Q&As on the topics of transparency and communications previously featured Czech central bank Vice Governor Mojmir Hampl, National Bank of Georgia's Vice Governor Archil Mestvirishvili, and the then-new Bank of Ghana Governor, Abdul-Nashiru Issahaku.

Transparency helps raise effectiveness of monetary policy – Q&A with Ghana's Governor

New Bank of Ghana Governor, Abdul-Nashiru Issahaku, underscored his committment to enhancing transparency and communication on monetary policy at the BOG in answers to my questions.

This is the third post in what I would like to develop into a series of Q&As on the topics of transparency and communications with leading central bankers around the world.

Prior to Mr Issahaku, I spoke to Czech National Bank Vice Governor Mojmir Hampl and National Bank of Georgia's Vice Governor Archil Mestvirishvili.

I first met Mr Issahaku personally in November last year when he was serving as Deputy Governor. We met again in April this year, by coincidence just a few days before he was appointed Governor. When I visited Accra in July, Mr Issahaku was firmly at the BOG's helm. This was when he agreed to become the third central banker, and the first governor, to answer the set of my questions.

So Mr Issahaku, what is your take on my questions?

Transparency increases effectiveness of monetary policy

What in your personal view is a clear signal of the transparency of a central bank?

Generally, in recent times, central banks are more transparent and accountable to the public but in different ways. To achieve price stability, which is our core mandate, and also sustainable growth in the long term, monetary policy must be conducted in a credible manner; and must be viewed as credible by the public. This way, inflation expectations will be low and the feed-through effect will be a less expected demand for higher wages and prices.

We are conducting monetary policy in a way to reduce inflation from the current level of 16.7 per cent (in July) to the medium-term target band of 8±2 per cent in the third quarter of 2017.

Mr Issahaku speaks at a press conference held at the BOG's headquarters in Accra (photo taken by myself).

Mr Issahaku speaks at a press conference held at the BOG's headquarters in Accra (photo taken by myself).

Also, in the pursuit of our mandate to maintain general price stability, it is just fair, as democratic principles demand, to be accountable, responsive and transparent to the public. Transparency will not only make you more accountable but also increase the effectiveness of policy.

The signal here is that the tight monetary policy stance has led to a drop in headline inflation from 19.2 per cent in March to 16.7 per cent in July. We see this to be an indication of the result of the open and transparent manner through which monetary policy has been conducted.

Central bank communication must avoid creating noise

How much more open could your central bank become? What are the limits on the transparency of a central bank? Where in your view does the transparency of a central bank have to end?

The central bank must, at all times, be accountable. The public, made up of different constituents, would want to know if the central bank is pursuing its mandate the right way. And this must be regularly demonstrated, which means that there are no closed ends to the question of openness or transparency, suffice to say also that in the pursuit of transparency and openness, however, attempts must be made not to create "noise". This is because the noise effect rather creates obscurity and makes it difficult for the public to understand what the central bank is saying. Economic outlook and policy strategy must be transparent and to the extent that the ultimate long term goal is sustainable growth, measures must aim at galvanizing public support for policy, and transparency can promote this.

Central bank communication message need to be consistent

What have you found to have been the most difficult moment in your central bank’s efforts in communications in recent years? What was the lesson learned?

There are never easy periods in central bank communications, except that whenever there is transparency, supported by a strong view of the independence of the central bank by the public, expectations are managed. When expectations are managed through these dynamics it makes it easier for policy stance. It is therefore all about the message and how it is delivered - and its consistency too.

Aside monetary policy, like all central banks, there are other responsibilities too, such as the oversight of the banking system- regulations and supervision. The public, for instance, would want to see that the central bank’s claim about the soundness of the financial system or about a particular institution is exactly what it is. So there is the conventional monetary policy, which may involve communicating the inflation target in an effective way, and the other responsibilities that may also require a significant level of public support for policy measures. The difficulty will only come when the communication strategy is not well thought through.

I must add, in conclusion that we are continually, like all central banks do, adding to the tools and instruments that would make our communication even better.

Clear central bank communication needed to reduce uncertainty

How important is communications to your central bank’s current policy? What is the biggest challenge in your communications at the moment?

Monetary policy communication aims to help educate the public about key economic concepts, Bank of Ghana’s mandate and policy objectives, the importance of achieving low inflation for long-term growth and the value of a transparent and operationally independent central bank. The strategy recognises that a proactive effort, transparency, and clear explanatory communication are required to win public support for the conduct of monetary policy under inflation targeting.

Also, other communication strategies have been identified as though non-specific to communicating monetary policy but are still dynamic factors that have impact on harnessing support for monetary policy stance. In some countries, especially in developing ones where information asymmetry is a big problem, there is the need for central banks to push harder with consistent messages that would shape behaviour so as to achieve the desired outcome.

Clarity reduces uncertainty by helping stakeholders anticipate central bank actions. To influence economic growth and inflation, greater clarity is what is needed, and not less of it!

I believe that central banks must work to ensure that the public understands monetary policy decisions and actions taken, to ensure that the financial system is sound at all times. As we roll out the current communication plan, l am sure these challenges would be surmounted.

All stakeholders need to have good understanding of central bank job

Who are the most important stakeholders in the communications of a central bank?

We have identified the following stakeholders in our communications strategy: The general public, financial markets, opinion leaders in academia, think tanks, the media, parliament and of course staff of the Bank. It is critical that all stakeholders have a good understanding of the central bank’s mandate, policies and activities.

Communicating short-term pain for long-term gain is difficult – Q&A with Georgia's Vice Governor

For my second post in what I would like to develop into a series of Q&As on central banks' transparency and communications, I chose to speak to National Bank of Georgia's Vice Governor Archil Mestvirishvili.

I first met Mr Mestvirishvili in 2014 when I led a review of the NBG's communications and organized a seminar for journalists on a visit to Tbilisi. Since then, we have occasionally bumped into each other in various central bankers' gatherings, and met once again on my follow-up visit to the NBG.

Over the past few years, the NBG was forced to weather a severe external shock and the ensuing currency weakness, in a highly dollarized economy, left the central bank vulnerable to populist attacks. The NBG's response was to dig in its heels, pursue its technocrat-oriented monetary policy, and fight to reassert its independence. Given what Georgia has been through, I myself was very much interested in finding out what Mr Mestvirishvili has to say on current transparency and communication challenges at the Tbilisi-based central bank.

As it happened, Mr Mestvirishvili answers came just as the NBG rolled out a new communications strategy.

So Mr Mestvirishvili, what is your take on my questions?

What in your personal view is a clear signal of the transparency of a central bank?

A central bank’s decisions must be clear and predictable. Economic agents should be able to understand the rationale behind them. Analysts should be able to replicate the models the CB is using and should have a clear understanding of all the exogenous assumptions that the forecast is based on. The central bank should regularly communicate with different audiences via press conferences, seminars, the internet and so on. Users should not have to spend a long time searching for data. When I was head of the macroeconomics and statistics department, I set the goal of making all the information I use for my own analyses available on the website for external users as well. I can say that 90% of the information is now publicly available on the NBG website.

How much more open could your central bank become? What are the limits on the transparency of a central bank? Where in your view does the transparency of a central bank have to end?

For a developing country in which financial education is not as good as we would like it to be, transparency has its limits. You can only be transparent to the extent that the market can digest. On the other hand, more transparency generates more credibility, which is vital for small central banks practicing inflation targeting. We are therefore gradually increasing our transparency. For example, we do not publish future interest rates at the moment, but we do try to provide some forward-looking messages about interest rates for the medium run and we will later start publishing the full interest-rate path.

What have you found to have been the most difficult moment in your central bank’s efforts in communications in recent years? What was the lesson learned?

The central bank has to make painful decisions in the short term to achieve benefits in the long term. Communicating that when the public isn’t able to foresee the long term is a difficult challenge. The Georgian banking sector is highly dollarized. Because of that, the exchange rate depreciation that resulted from the external shock created a wealth redistribution effect and the central bank's decisions were therefore moved into the political domain. Given the low financial education of the general public, there is room for populists to advocate measures that might generate some short-term improvements but will create significant long-term economic problems. As for the lesson learned, we should invest more in financial education, communicate during normal times, and be more active against dollarization, as this is not just a financial stability issue, but can also undermine the independence of the central bank.

How important is communications to your central bank’s current policy? What is the biggest challenge in your communications at the moment?

Elaborating a meaningful communication strategy/guidelines is one of our top priorities. We started regular policy communications in April.

Who are the most important stakeholders in the communications of a central bank?

The ultimate target of our communications is the general public. However, we need to split the general public into different target groups. At this stage we are focusing more on “opinion makers” such as business people, economists, experts, politicians, and journalists. Via this group we expect to influence “decision makers,” or bank clients, depositors, and borrowers. The most relevant indicator of our communication efficiency is how the degree of dollarization of the economy changes as we communicate, so the latter group is very important. The decision makers are those who decide what currency to save and borrow in. If they save and borrow in lari, it means they trust the National Bank of Georgia. Increasing larization may show us that we are on the right path.


Back in March I decided to, once in a while, ask a leading central banker a few questions about transparency and communication and publish their answers on Lombard Rates.

My first central banking communications Q&A - published in March - was with Czech National Bank Vice Governor Mojmir Hampl.

Central bankers’ communication puzzle – Q&A with Czech Vice Governor

Once in a while I would like to ask a leading central banker a few questions about transparency and communication and publish their answers on Lombard Rates.

For the inaugural post in what will hopefully evolve into a series of Q&As on these topics, I chose to speak to Czech central bank Vice Governor Mojmir Hampl.

First, I have known Mr Hampl for many years thanks to my previous jobs, interviewing him regularly as a business journalist and later working almost on a daily basis with him with as Director of Communications and then Chancellor at the Czech National Bank.

Second, Mr Hampl is a relatively rare breed of central bankers in that he strives, as much as he can, to use plain words to talk to the general public about such complex matters as monetary policy. In that regard, I myself was interested in finding out what he has to say on current transparency and communication challenges at central banks.

So Mr Hampl, what is your take on my questions.

What in your personal view is a clear signal of the transparency of a central bank?

Quite honestly, the primary indication can be found by looking at a given institution's web page. If I am interested in anything about a particular central bank, I immediately – because I'm impatient and want the information NOW – have a look at their website. If I am able to find three out of three of my sought pieces of information, I take that as a reasonable signal of the transparency of the concerned central bank. Moreover, if I can find specific information quickly, I can see that someone there is thinking about effective communication. In this respect, I regard the Czech National Bank as a highly transparent bank because, if I need to find certain information about it immediately, instead of going through a lengthy process of asking people at the bank, I first open our web page and try to find the answer and I usually succeed.

How much more open could your central bank become? What are the limits on the transparency of a central bank? Where in your view does the transparency of a central bank have to end?

I don't think there is a firm limit to the openness of a central bank. It's like the development of human knowledge – it too has no limit, it's rather an endless process. Transparency is about your attitude, your approach – if disclosing information doesn't jeopardise you in the pursuit of your statutory objective, doesn't cause you prohibitive costs and doesn't asymmetrically help another party with whom you have, say, a legal dispute, then such information should in principle be public. Sir Humphrey Appleby says: "If no one knows what you’re doing, then no one knows what you’re doing wrong." A transparent central bank doesn't think that way.

What have you found to have been the most difficult moment in your central bank’s efforts in communications in recent years? What was the lesson learned?

In general, the whole situation after the economic crisis in 2008 was very difficult. This was not only true for the CNB, but for many central banks worldwide. Monetary policy (whose defining feature is that it's working best when people don't notice it) has become a standard part of public debate, with all that that entails: disinformation, demagogy, misunderstandings, slander, personal attacks and so on. I believe no one in the central banking world was prepared for the debates about central banks to become as common as the public conversation about soccer or politics. We are all struggling with that even today.

How important is communications to your central bank’s current policy? What is the biggest challenge in your communications at the moment?

The biggest challenge? To explain to people that we live in a system of elastic money (i.e. money with no intrinsic value and no fixed quantity) without them starting to doubt the very foundations of that system. It is really a paradox. As long as elastic money works normally, no one thinks about why we pay with it and why we save in it. This is proof that a central bank is doing a good job, because money is maintaining its purchasing power thanks to price stability and no one has to think about why it is so. Generally, we as consumers like systems that work without us having to wonder why – why the lights go on when we want them to, why a car engine runs every time we start it, why we can pay smoothly by card in so many places. We start to think about a system only if a problem occurs – when there is a blackout or the engine doesn't start. The challenge for the central banks is to explain that everything they have been doing since 2008 is in an effort to prevent, not to create, a blackout! Many people in money-conservative countries such as the Czech Republic still live psychologically on the gold standard. This doesn't matter in good times but, in bad times, it makes the job of communicating difficult for central banks, which explain that there is no gold standard and thereby try to do their utmost to build public understanding of their objectives and actions, and thus enhance their credibility. But people are unsettled by their explanations and, for their own peace of mind, prefer to live in the illusion of the gold standard, which, however, central banks can't support. Yet, without central banks taking action in bad times, we can hardly have good times when people don't have to think about the system. I would call it the communication puzzle of the ordinary central bankers in my country.

Who are the most important stakeholders in the communications of a central bank?

That's easy: purely and simply the general public. Monetary policy is also politics, but politics cut off from the usual political mechanics. Interest rates, exchange rates and inflation affect everyone but, as I hinted earlier, this is somehow more immediate to everyone in bad times. My experience ultimately is that prejudices, opinions and comments about the central bank often do not differ between the general public, politicians, journalists and business leaders. So, if an aspect of communication works on the general public, it works on all imaginable stakeholders.