Bank of Russia mimics commercial banks in holding an investor conference call

The Bank of Russia reaches out to a broader international expert public via an inaugural joint meeting and conference call with institutional investors. A release by its Press Service:

“Among the main points of discussion were the decisions of the recent meeting of the Bank of Russia’s Board of Directors, inflation expectations and risks as well as economic forecasts. More than 50 representatives of local and international investment funds, including from the US, UK, and continental Europe, participated in the meeting and the call.

The Bank of Russia will be holding regular meetings and teleconferences with institutional investors to increase information transparency and provide an insight into the Bank of Russia’s monetary policy.

Russia’s central bank will organize such meetings and teleconferences on a quarterly basis, following each publication of the Monetary Policy Report.

There seems to be a clear trend emerging: Central banks increasingly employ communication techniques pursued by commercial companies in establishing a two-way dialog with key stakeholders.

The more people understand monetary policy, the happier they are with central banks

Albeit fairly intuitive at first sight, now academic research has lent support to this notion: The more people understand monetary policy, the happier they are with central banks. Put differently, as a recent paper argues: “The less someone knows about central banking, the less likely he or she will be satisfied with the institution.”

Many central banks, from both developed and developing countries, have been running educational programs and reaching out to the wider public over the past years. Adriel Jost of University of St. Gallen and Swiss National Bank (SNB), provides clear justification for such efforts in the paper titled “Is Monetary Policy Too Complex for the Public? Evidence from the UK”:

Average satisfaction with BoE's policy since 2001.

Central banks have increased their engagement in the information and education of the broad public. But what can be said about the nonprofessional’s knowledge of monetary policy and central banking? Based on the Bank of England’s Inflation Attitudes Survey, I construct a score to capture the central banking knowledge of the respondents. I show that the average British person displays limited knowledge of central banking. At the same time, the data reveal that satisfaction with the Bank of England’s policies increases with a better understanding of monetary policy.

Investing energy and money to increase transparency and broaden communication outreach activities to financially educate the public and explain what central banks are doing and how seems vindicated by this analysis. That said, the paper also concludes, and quite rightly, that central banks might benefit from a certain level of financial ignorance among members of the public:

“No one can be forced to learn. People may simply have no incentives to learn about monetary policy, especially if they are generally satisfied with the central bank … All the more, ignorance in monetary policy may be appropriate, as monetary policy knowledge is less necessary in everyday decisions than financial knowledge.

As policy normalizes, Czechs re-publish numerical exchange rate forecast

  Exchange rate forecast:  The confidence intervals of the CZK/EUR exchange rate forecast reflect the predictive power of past forecasts (from the period before exchange rate commitment). They are symmetric and linearly widening.

Exchange rate forecast: The confidence intervals of the CZK/EUR exchange rate forecast reflect the predictive power of past forecasts (from the period before exchange rate commitment). They are symmetric and linearly widening.

The Czech National Bank (CNB) resumed the publication of a numerical exchange rate forecast in the form of a fan chart in a move that it said was part of the normalisation of its monetary policy.

This re-establishes an extraordinary level of forecast transparency which was temporarily curtailed in late 2013 as a result of an out-of-the-box policy decision. Now the Czech central bank returns to the practice launched in 2009 when it became the world's only central bank to publish forecasts for the nominal exchange rate against a specific currency in numerical form.

As heralded in my January Q&A with Jan Filáček, my former colleague and Deputy Director of Monetary Policy and Fiscal Analyses Division at the CNB’s Monetary Policy Department, a smooth exchange rate forecast re-launch had been foreseen by Czech central bankers.

In a box included in this year’s first Inflation Report and titled “Return to the publication of numerical exchange rate forecasts” , the CNB wrote:

 The actual exchange rate usually deviates from the forecast, sometimes significantly (CZK/EUR)

The actual exchange rate usually deviates from the forecast, sometimes significantly (CZK/EUR)

Although the exchange rate forecast may not materialise, it gives market participants a guide to the future monetary policy stance.

With knowledge of the exchange rate that the central bank uses in its forecasts, they can better assess how new information affects the balance of risks to the forecast. As a result, they can better understand the Bank Board’s decisions. For example, if the exchange rate is appreciating faster than forecasted but the prediction is materialising in all other respects, it is likely that the central bank will compensate for the greater tightening of the monetary conditions via the exchange rate by tightening policy less via interest rates. If the markets take this into account, their expectations of future interest rate growth will be lowered, which in turn will lessen the rate of appreciation. Therefore, publication of the exchange rate forecast by the central bank has a stabilising effect. This is ultimately beneficial to the whole economy.

The Czech experience of gradually increasing, and in the case of the exchange rate forecast even temporarily decreasing, forecast transparency offers plenty of food for thought to central bankers from low income and other developing countries that are modernizing their monetary policy frameworks.

Bank of Lithuania reaps award for user-friendly website

The Bank of Lithuania was picked by Central Banking as the website of the year in the industry. The winning central bank says the strong point of its website is its user-friendly information architecture.

Central Banking in providing justification for the award:

A key feature of the new website is how each of the central bank’s functions (eg, monetary policy, payments, reserve management) is explained to the user. Large blocks of text peppered with technical terms have been replaced with short introductory paragraphs, videos, infographics and links to further information.

The videos are particularly eye-catching … The videos succeed in making the content resonate with its entire audience.

While other central banks have also used video, the consistent application across a website is rare, as is the quality.

The Bank of Lithuania’s website was launched in April 2017 following a revamp which involved more than 100 employees in a development project that took about 17 months. As the site evolves further, the Bank plans to create and feature more videos on financial education as well as personalise the presentation of statistical data.

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While the new website is cool and beats those of many other central banks, I cannot help but argue that the language used on the pages and in videos remains too technical and complicated to follow for an ordinary member of the public. One example: This is how the Bank explains its mission in the introductory video on “Who are we?”:

“Our mission is to bring benefits to society while seeking to foster a reliable financial system and ensure sustainable economic growth. To achieve this, we implement various measures.”

This is the lingo of an academic paper.

This year’s transparency champion: Ireland

 Central Bank of Ireland

Central Bank of Ireland

The Central Bank of Ireland has won Central Banking’s Transparency Award for taking a “proactive approach to openness” and progressively revealing more of its inner workings to rebuild its credibility in the wake of the global financial crisis.

Central Banking staff on selecting the Central Bank of Ireland (CBI):

The CBI has had to work hard in winning back the public’s trust. It might have tried doing so by keeping as much hidden as possible, by increasing its opacity. Instead, it has opted for a diametrically opposed strategy: to embark on a process of educating the Irish public about complicated financial matters, and to open up more and more of its own workings, in an effort to win public support.

The CBI may come to stand as an example to its peers of how to deal with a loss of public support after a crisis. Its transparency initiatives have been a model of a central bank winning back respect by speaking clearly and honestly to the people it serves.

In my view, the Irish central bank clearly stands out from the field for publishing lots of detail about internal proceedings, travel expenses, salary scales and contracts, and also for its outreach activities to financially educate the public and explain what it is doing and how in a simple and illustrative way.

As Central Banking put it, “the 'explainers' of various financial topics published on its website are some of the clearest and most comprehensive efforts produced by any official body.”

Philip R. Lane, Governor of the Central Bank of Ireland, speaking on the announcement of the award:

“Accountability and transparency are a key part of our strategy to safeguard stability and protect consumers. The award recognises our high standards of governance, risk management, transparency and accountability, and reflects our vision of being trusted by the public and respected by our peers.”

Future of monetary policy communication: Open, clear, explanatory, and aimed at public

Alan S. Blinder, a Princeton University scholar and former Fed official, has made a couple of predictions on the future of monetary policy communication for the next few years. His academic account to a large extent fits my perceptions of the general trend in central banking communication, based on my practical experience with central banks modernizing their policy frameworks. Below I quote, and comment on, two of the Blinder’s six predictions.

Blinder’s prediction # 1: Transparency about monetary policy will increase over time.

Blinder: “I feel confident in predicting this as a generic statement, although the pace and details will vary from one central bank to the next. After all, some are extremely transparent already, while others are less so. But virtually all central banks have been moving in one direction in recent decades--toward greater openness--and I don’t believe that process is over. This prediction derives in part from pretty strong historical evidence that transparency is a one-way street: Once a central bank moves toward greater transparency in some dimension, it never reverts back to its old, less-transparent ways.”

My comment: There is indeed a global trend among central banks towards greater openness, and it is particularly visible in currently less transparent central banks of many low income and developing countries. As soon as a central bank modernizes and aims to become more forward-looking in policymaking, increasing policy and economic transparency becomes necessary. The only detail I would dispute is that there “never” is a way back once a central bank opens up. As illustrated by the recent case of the Czech National Bank, a temporary restriction on transparency, at the very least, remains a viable option at policymakers’ disposal should they decide so in the interest of their policy effectiveness.

Blinder’s prediction # 4: Central banks will keep trying to communicate with the general public, as they should. But for the most part, they will fail.

Blinder: “Much as we may believe that an independent central bank in a democracy should communicate with the citizenry, only a tiny fraction of the citizenry will tune in … You speak one way if you are addressing experts who understand the jargon and dote on every word, quite another if you are talking to members of the broad public who lack both expertise and interest and who are half-listening at best. I am a big believer in democratic accountability, which requires communicating with the broad public. But in truth, the part of central bank communication that matters most is the way policymakers communicate with markets—and for a simple reason: Market participants listen.”

My comment: Here Blinder has a point. As marketing guru Seth Godin has put it, nowadays “there's so much noise, so much clutter... that hoping that (people will) listen closely and carefully enough to figure out what you mean is a recipe for frustration.” And Godin offers a simple alternative: “Maybe, instead of insisting that people listen more closely, you could speak more clearly.” This is exactly what most advanced central banks, with those less advanced in their wake, have been painstakingly striving for: Use as plain and clear language as possible to explain themselves. As Blinder concludes: “It’s high time that central banks, which have travelled a long way down the communications road already, cease viewing words as scarce commodities to be given only grudgingly. Montagu Norman was wrong; they should explain.” Indeed, gone are the days of Montagu Norman, the Governor of the Bank of England from 1920 to 1944, who is often cited as saying that the role of a central banker was: “Never explain, never apologize”.

Blinder made the predictions in a paper titled “Through a Crystal Ball Darkly: The Future of Monetary Policy Communication”, prepared for the Annual Meetings of the American Economic Association, Philadelphia, January 6, 2017.

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

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.

Speaking to public in plain and concise form promoted at all star central bank conference

The world’s top central banks have taken their fair share of criticism not only for adopting unconventional policies following the financial crisis but also for failing to explain the unorthodox measures they were taking in language that could be understood by the general public. It is clear they have learned the lesson from that.

Following are a couple of takeaways I made from watching the world’s leading policymakers discuss central bank communications at a recent all-star conference on this topic at the European Central Bank.

  • Major central banks such as the Federal Reserve, ECB, Bank of England and Bank of Japan clearly understand that they need to be clearly understood to influence public expectations and remain credible. Code words and convoluted language have fallen out of fashion. Plain talk in simple language is the new trick of the trade.
  • Despite the push for greater transparency and clarity in communications, policymakers — constantly faced with a wide array of economic uncertainties — are unlikely to provide the degree of certainty on the future policy path that markets have generally been longing for.
  • To make complex forecast and policy messages accessible to the wider public, central banks increasingly tailor the content of their pronouncements to the requirements of each communication tool they are using, and to the audience watching that particular channel of communication. The BoE has dubbed this technique “layering”.
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Below is a selection of key quotes from a policy panel debate — led by Bank of England’s Mark Carney, ECB’s Mario Draghi, Bank of Japan’s Haruhiko Kuroda, and Federal Reserve’s Janet Yellen — that I personally considered in any way interesting and inspiring:

Haruhiko Kuroda, Bank of Japan

“Communication is not a matter of technique … it is a matter of policy itself. From my experience in the last 4-1/2 years, the best communication policy is to explain in straight words the content and intent of your monetary policy which can be understood not just by monetary experts and economists, but also the general public.”

Janet Yellen, Federal Reserve

“We try not only to explain what changed about the economic outlook that justified (our policy action) but also the objectives we are trying to achieve. For the broader public, as opposed to market participants, the most important thing to know is what it is that we are trying to achieve?

They do want to know that we are committed to our 2 percent inflation objective, that we want to achieve our employment mandate. We will readjust these (policy) instruments as we think necessary in light of those policy goals, that’s are our commitment.

But I do think that market participants are looking for greater certainty about the policy path than central bankers believe is appropriate to offer most of the time.”

Mark Carney, Bank of England

“Look at what we put out: a 50-page Inflation Report, we still communicate in 15-page speeches with lots of charts, expert audiences read them, understand, digest, respond to them, that’s true, but that’s not the way to communicate with the general public. This is not a sustainable form of communicating in a world that has had enough of experts, it is also not consistent with how people access information.

(To make information accessible), you have to change the content. What we have tried to do … is to layer the content, so you have a very simple message that is tweet-able, that can go out on whatever decision is made… and to take a 50-page Inflation Report and reduce it down to a relatively simple narrative with icons, key charts that explain why we did what we did, and then to use multiple channels in order for that to get out.

In order to be as effective as possible on speaking with the broader public and actually ultimately getting to a dialog as opposed to a monolog with them, we need different channels, we need different content, but we need that change within the institution, and you only get that if you open it up to a broader number of people that just those at the top.”

Sri Lanka stresses benefits of clear communication

Sri Lanka’s top policymaker underscored the importance of clear and consistent communication in managing the public’s expectations about inflation.

Nandalal Weerasinghe, Senior Deputy Governor at the Central Bank of Sri Lanka, noted in a speech on Evolution of Monetary and Exchange Rate Policy in Sri Lanka and the Way Forward:

“… the intent of the Central Bank to maintain inflation at mid-single digit levels, which was made clear through action as well as through communication, enabled the Central Bank to change the mindset of the people that Sri Lanka is typically an economy with double digit inflation. The change in the mindset was visible in improving inflation expectations … Sri Lanka’s achievement of single digit inflation for 105 consecutive months had little to do with monetary aggregate targeting. Instead, it was a result of the Central Bank’s ability to anchor inflation expectations, by repeatedly emphasising its utmost desire to maintain inflation at mid-single digit levels.”


The Central Bank’s plan to fully implement what it calls “flexible inflation targeting” by 2020 will require, as Weerasinghe put it, "increased efforts" to build all the necessary preconditions for success. Increasing transparency will be key in this regard:

A key advantage of inflation targeting is that it is easier for the general public to relate to. Since inflation is well understood by the public, the inflation forecast will serve as an ideal anchor and, with improved communication, will help bridge the information gap between the central bank and the public. Reference to such a straightforward target, rather than to an elusive monetary target, will ensure increased transparency and accountability while enabling the public to understand policy shortcomings.


The next step in increasing the Central Bank's forecast transparency will be the publication of comprehensive Inflation Reports, expected by 2020:

“The Inflation Report will explain inflation developments, inflation expectations, projections for inflation and other key macroeconomic variables, the assumptions behind such projections, reasons for any deviation of actual inflation developments from targeted levels, and remedial actions to be taken in the case of deviations.”

I have advised Sri Lanka's central bank on policy communications and think that its experience, if successful in evolving into an inflation targeter in the coming years, may inform the initiatives of other developing countries' central banks which have been switching to more forward-looking policy frameworks.

Never ending debate: Does central bank transparency do more harm than good?

A paper by two Swiss National Bank economists has cast doubt on the benefits of greater central bank transparency and increased communication in enhancing the predictability of monetary policy.

Thomas Lustenberger and Enzo Rossi, in their paper titled “Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts?”, conclude that central bank openness and too frequent talk by policymakers tend to confuse private forecasters, causing errors in their interest rate forecasts.

The paper provides yet another contribution into the seemingly endless debate among academics and practitioners about the benefits and drawbacks of the shift towards greater transparency and more frequent communication in central banking over the past two decades.

As one would intuitively expect, and I completely agree with based on my experience in working with a number of central banks across the developing world, the paper suggests that there is no single, one-size-fits-all model for transparency and that its effects that vary greatly across countries and variables.

That said, the paper makes a number of important points that are worth considering by policymakers and communication managers in developing countries’ central banks aspiring to raise their policy transparency and enhance communication.

Don’t expect wonders from greater transparency:

  • central bank openness is not an effective instrument to improve the accuracy of private forecasts;
  • the publication of voting records is even detrimental to the quality of interest-rate forecasts;
  • more transparency contributes to aligning single forecasts with each other. From this perspective, transparency seems to provide the anchor by which agents’ forecasting actions are coordinated.

Don’t presume more talk is always better than less talk:

  • the verdict about the frequency of central bank communication is unambiguous. More communication produces forecast errors and increases their dispersion;
  • speaking less may be beneficial for central banks that want to raise predictability and homogeneity among financial and macroeconomic forecasts. We provide some evidence that this may be particularly true for central banks whose transparency level is already high;
  • a higher turnover of governors tends to reduce the precision of interest-rate and inflation forecasts. Greater central bank independence also tends to worsen the quality of forecasts, perhaps by increasing the size of monetary policy committees that may lead to cacophony.

Policy implications of greater transparency and enhanced communication

“… the policy implications are not clear-cut. If the policy objective is to get forecasters to provide more-precise forecasts, our results suggest that transparency is not an adequate tool to achieve it. However, if the objective is to align individual forecasts, then the general normative implication seems to be an increase in transparency.”

“… in order to improve the quality of forecasts of variables that are central to monetary policymaking and align them among professional forecasters, central banks ought to speak less often, especially those that have already achieved a certain degree of transparency.”

Caveat: Don’t read too much into the results of this study…

One important caveat is in order, a point made by the authors themselves: The study and its framework cannot be seen as definitely answering the question whether more or less communication is desirable and whether the degree of transparency should be increased or lowered.

“Our paper only studies the effect of communication and transparency on forecast accuracy and dispersion. Although the impact of communication and transparency on this dimension is important, there may be many other beneficial (or harmful) effects of giving public speeches or being transparent on, for instance, accountability, the public’s understanding of monetary policy, and trust in the central bank.”

Very true. One can never underestimate the benefits of well-designed communication in promoting the understanding of monetary policy, and with it developing public trust in the central bank.