BoE

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”.
2017-12-19 - Screen Shot 2017-12-19 at 09.18.50.png

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.”

'The Old Lady of Threadneedle Street' at forefront of embracing new media

In yet another sign of central banks tailoring their ways of communicating to the new media, the 'The Old Lady of Threadneedle Street' invited members of the public to pose questions to one of the Bank of England’s policymakers on Twitter.

One particular question stood out, in my view, demonstrating the public’s increasing appetite for visual communications by central banks, which is an area where these traditionally text- and spreadsheet-based institutions have lagged behind:

Despite being quite well ahead of many other central banks, the Bank of England is still trailing its U.S. counterpart. At the Federal Reserve, some policymakers, notably Minneapolis Fed President Neel Kashkari, have extensively used social media accounts and blog posts to reach out directly to their audiences.

Study on households' inflation expectations: Target matters

The Bank of England's Quarterly Bulletin, answering the critical question for an inflation-targeting central bank: How are households' inflation expectations formed?

People’s expectations about future inflation are an important influence on the current rate of inflation: when people believe that inflation will be at target in the medium term they set wages and prices in a way that is consistent with those beliefs.

The study was conducted just on the UK economy, but its conclusions have wider relevance.

Not surprisingly, one of the primary drivers of inflation expectations are recent changes in prices in shops. Still, it is good to see that the level of an inflation target does indeed play a role over the longer run.

Households’ inflation perceptions are an important influence on the inflation expectations of many households, particularly at shorter horizons. And historically, changes in inflation perceptions are estimated to be associated with a similar scale change in one year ahead inflation expectations.

The relationship between changes in CPI inflation itself and households’ inflation expectations is far less strong, and not statistically significant at longer horizons.

Households’ inflation expectations, particularly at longer horizons, are also influenced by a wider range of macroeconomic factors, including the inflation target.

Worth reading in full.

Major central banks sing the same tune after Brexit

In the wake of the UK vote to leave the EU, the world's leading central banks appeared to have coordinated their public statements. They sang from the same song sheet in their statements to reassure markets about their commitment to provide liquidity and take policy measures as needed to fulfill their statutory responsibilities.

Let's have a look what each of the major central banks had to say:


BOE - "ready to provide additional funds"

Mark Carney, Governor of the Bank of England, in a televised statement following the EU referendum result:

... as a backstop, and to support the functioning of markets, the Bank of England stands ready to provide more than £250bn of additional funds through its normal facilities.

The Bank of England is also able to provide substantial liquidity in foreign currency, if required.

In the coming weeks, the Bank will assess economic conditions and will consider any additional policy responses."

The BoE also put out on its website a list of answers to most frequently asked questions about Brexit.


ECB - "ready to provide additional liquidity"

In a press release headlined "ECB is closely monitoring financial markets", the European Central Bank said:

"The ECB stands ready to provide additional liquidity, if needed, in euro and foreign currencies.

The ECB will continue to fulfil its responsibilities to ensure price stability and financial stability in the euro area."


Fed - "prepared to provide liquidity"

The U.S. Federal Reserve said in a two-sentence, one-paragraph statement:

"The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy."


G7 - "ready to use the established liquidity instruments"

G7 Finance Ministers and central bank Governors in a statement:

We recognize that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.

G7 central banks have taken steps to ensure adequate liquidity and to support the functioning of markets. We stand ready to use the established liquidity instruments to that end.

We will continue to consult closely on market movements and financial stability, and cooperate as appropriate.


Japan - "will take appropriate measures as necessary"

Japanese finance minister and central bank governor issued a join statement:

"The Ministry of Finance will monitor further developments of the foreign exchange market more carefully than before and take appropriate measures as necessary. Such measures are consistent with the agreements in G7 and G20.

We are also aware of risks related to liquidity funding in foreign currencies. In this regard, a network of currency swap arrangements is already established by the central banks of major countries. The Bank of Japan will take appropriate measures as necessary, including activation of this network."

Plain talk by BoE: One can hardly understand us

Pretty much every central bank has sought to simplify its policy message and make it as clear and accessible to the general public as possible. However, few central banks are as transparent as the Bank of England to admit publicly that their efforts are bringing little results.

Bloomberg, reporting on a talk given by Andrew Haldane, BoE's Chief Economist:

Communications from the U.K. central bank are too complex and inaccessible to the man on the street, Haldane said in a — ahem — 9,000-word speech in London on Wednesday.

Haldane, saying in his speech:

... the vast majority of the Bank’s publications may be inaccessible to the vast majority of the general public.

Having assessed my own speeches, including this one, the conclusion is much the same. They, too, are likely to be impenetrable to most.

Plainly, there is further still for us all to go, myself very much included, in simplifying our communications to enable us to speak clearly to those we serve.

Finally, the central banker used plain and simple language to "plainly" sum up his message.

As Haldane himself demonstrated in his talk, speaking clearly, in an easily-accessible language, on complex financial and central banking topics is indeed a difficult mission to accomplish.

BoE's Carney right to speak up on Brexit risks

Was Bank of England's Governor Mark Carney right to speak his mind on the potential outcome of a UK vote to leave the European Union? I strongly believe so.

The BoE's Monetary Policy Committee said the June 23 referendum posed "the most significant risks to the MPC’s forecast".

A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy. Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise.

At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. Sterling is also likely to depreciate further, perhaps sharply.

This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than in the central projections set out in the May Inflation Report.

This was the BoE's strongest warning yet of the risks in the June 23 referendum, according to Bloomberg.

Such straight talk provides a perfect role model for central bankers in many emerging and developing countries who have been struggling to talk openly about their forecast risks, partly to avoid ruffling politicians' feathers.

Carney's warnings, obviously, left the BoE open to criticism that it is not unbiased.

But Carney could not have sidestepped the issue and in my view he used the right words to defend the MPC's analysis, saying Brexit is the “biggest risk” facing policy makers' remit and the political choice would be to suppress it.

“This is the independent MPC looking dispassionately at issues in the fulfillment of its remit,” he said. “It’s better to outline those rather than for them to pop up and address them in real time.”

Keeping mum on what the central bank singled out as "the most significant" risk to its economic outlook would have been, in my view, far more irresponsible than speaking openly about the possible consequences of Brexit.

BoE joins the 8-meetings-a-year club

Bank of England is cutting the number of regular policy meetings its MPC holds every year to eight. Until now, the MPC has met every month to set monetary policy.

In September 2015, the Bank announced that the Monetary Policy Committee (MPC) would move promptly to a schedule of eight regular meetings a year once the Bank of England Bill had received Royal Assent.

With the Bill having received Royal Assent on 4 May, making it an Act of Parliament, the Bank can now confirm the MPC will move to this new schedule.

Following its previously announced intentions, the scheduled MPC meeting ending on 13 October will be the first to be dropped under the new arrangements. Similarly, the meetings provisionally planned for January, April, July and October 2017 would also be removed from the schedule. The meeting schedule for the MPC will be updated as usual this autumn.

Scheduling eight policy meetings a year is becoming common practice among inflation targeting central banks.

Those who follow such 8-meetings-a-year routine include my former employer the Czech National Bank or Bank of Canada.

New Zealand's Reserve Bank is an exception, having switched as of this year to reviewing policy seven times a year instead of the previous eight times a year.

BoE blog post proves Friedman right

Bank of England, on its Bank Underground staff blog on flexible exchange rate regimes:

When ... using a panel of 180 countries over 1960-2010, I find robust evidence that flexible exchange rates deliver a faster current account adjustment among developing countries.

...flexible exchange rates do deliver a faster adjustment of the current account for developing countries. After all, the data seems to verify the intuition put forward by Freidman more than sixty years ago.

Blog is certainly a great tool for central banks to share results of research like this one.

Even mighty BoE faced with cyber threats

Not only the Bangladesh's central bank is faced with cyber threats.

Quite unsurprisingly it emerges that even the mighty Bank of England has frequently seen hackers probing for vulnerabilities in the central bank’s computer systems.

Bloomberg News, reporting on the revelation the BoE made in a response to a Freedom of Information request by the news organisation:

“The bank faces advanced, persistent and evolving cyber threats from a variety of sources which call for extreme vigilance,” it said in a January letter.

These stories are likely to lead to an increase in spending on computer security by central banks and other financial institutions.

More central banks pick top leaders via open tenders

The Bank of Canada has announced the appointment of a new Deputy Governor following an open search process involving an outside headhunter.

When launching the search, the Bank said:

The Board of Directors has formed a selection committee to conduct the search and selection process, with the assistance of global executive recruiting firm Boyden. Public advertisements for the Deputy Governor position have been published on the Bank's web site, as well as in The Globe & Mail and La Presse newspapers, and the on-line edition of The Economist.

The practice of employing outside consultants or running an open, public tender to hire top central bankers has recently spread in English-speaking countries.

An executive search firm was contracted last year to pick a new Governor of the Central Bank of Ireland.

U.K. Chancellor of the Exchequer George Osborne earlier in February also advertised for the position of Deputy Governor of the Bank of England to replace outgoing Andrew Bailey.

Quite different practice from what I witness in a number of countries that are frequently visit, where central bankers seem to secure their jobs thanks to their political connections or affiliations, rather than on merit.

I dare to say the candidates selected via an open search will enjoy greater reputation, be more independent-minded and stronger to handle the pressures of their positions than central bankers who owe their jobs to deals made behind closed doors.