Central banks’ communication: could do better
Taking something simple, and complicating it
by Gabriel Stein
Wed 18 Sep 2013
An expert, on some definitions, is someone who takes something simple and complicates it. That would certainly make central bankers experts at communication. As I pointed out in an article in the September 2013 OMFIF Bulletin (‘Limitations of a new policy fashion’), central bankers have taken what should have been a tool aimed at simplifying communication with markets – forward guidance – and complicated it.
According to a survey by Barclays Bank, financial markets perceive that central banks’ communications skills have deteriorated over the last few years. On a scale of one to 10, the Federal Reserve scored 7.1, down from 7.4 in 2007; while the European Central Bank scored 5.7 compared with 7.2 and the Bank of England 6.2, down from 6.9 six years earlier. Only the Bank of Japan’s score rose, apparently modestly.
Two points spring to mind.
The first is the issue of whether central banks should really be transparent. The fashion for transparency is new. Not so long ago, secrecy was all the rage, with markets being left to find out policy based on central bank action. A successful central bank decision was one that surprised markets.
On the whole, transparency and clear communication are good. This can calm markets in periods of turmoil. But there are still times when opacity and surprise can be better – for instance, for a central bank planning currency intervention.
We have seen over the last few months how attempts at clarity from the Federal Reserve and the Bank of England have had undesirable side effects. In the case of the Fed, rather than prepare markets for the inevitability of tapering of quantitative easing, talking about it unsettled markets and enabled objections to be marshalled.
As for the Bank of England, its forward guidance is clear – but hedged about with ‘knockouts’ which in effect means that the Bank can still do whatever it wants to, thus diminishing both clarity and transparency.
The second point is that communication is about much more than forward guidance. The Barclays report’s low marks for the Bank of England are apparently partly due to the frequency of openly-expressed dissent. On that basis, the ECB, where dissent is rarely expressed publicly (unless you are the president of the Bundesbank), should have been ranked higher.
Communication is about how central banks communicate their views and decisions – via minutes, statements or press conferences. It’s also about how they listen to financial markets and are prepared to take what they hear into account. In other words, it covers the whole gamut of central bank and market interaction.
Rightly or wrongly, central banks – and markets – currently put a premium on transparency and clarity of communication. From that perspective, it is worrying that the market perception is one of deteriorating, rather than improving communication skills.
Prof. Gabriel Stein is Chief Economic Adviser of OMFIF.
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