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.