Monetary policy communication and the strategy review
What central banks say can affect markets, the economy and people’s lives. Central bank communication has become a tool of policy in recent years. The ECB needs to be understood by markets and experts, but also by the wider public so that people can have trust in the institution and its policies.
As a result of the strategy review, the Governing Council agreed to modernise its monetary policy communication, to reach out to wider audiences, and to make listening a regular feature of its communication.
Words can have powerful effects
What central banks say can have a huge impact on markets, the economy and on people’s lives. That is why central banks are very careful with the language they use.
The importance of credibility, clarity and consistency
To be effective, central banks must be credible. And to be credible, central banks need to say what they do, and do what they say. Our communication needs to have clarity and consistency. Clarity does not necessarily mean that we talk more. Too many voices, speaking at the same time, may actually cause confusion. Clarity simply means that we give a clear message about what we intend to do. This message should be consistent, and it should be reflected in our actions.
A roadmap for future policy moves
Because words are so important and can have real effects in the economy, communication has become a “tool” of monetary policy. For example, by letting markets know where we expect interest rates to be in the future, we can bring about a change in the price of borrowing for businesses and people. Experts call this “forward guidance”.
Think of forward guidance as a roadmap with different routes marked out for the next monetary policy steps. Markets use this roadmap, together with new information about the economy, to work out whether we will stick to our announced path, or whether there is another route we are likely to take next. In this way, forward guidance can reduce uncertainty about the future.
Making sure that we are understood
Central banks, including the ECB, communicate a lot with markets, experts and specialised media. Those need very precise and often complex and technical information, which may not be easily understood by most people.
We want to do a better job at reaching out to people and businesses because their behaviour is important for monetary policy. How they spend and invest today, and expect the economy to develop tomorrow, can affect our job of keeping prices stable.
Communication helps people to better understand what we do. And this also helps to build trust. Trust means that people have confidence in what we say and do. That makes our monetary policy more effective. But not only that: trust is especially important because we are an independent institution. We need to explain in very clear terms what we are doing to achieve our goal so that we can be held to account by the people and their elected representatives.
That is why the Governing Council agreed to modernise our communication and make it more understandable.
We are listening
The strategy review has been a great opportunity to explore how to improve the way we communicate our monetary policy with markets and with the general public.
One great way to make sure that we are well understood is to turn our communication into a conversation. During our Listening events, we heard and discussed the concerns of civil society and people at large.
Learning directly from people about their worries and what they expect from their central bank has expanded our views of how to conduct our policy. That is why we are making listening a regular feature of our communication. We are looking forward to continuing the conversation. We hope you are too.
We want to explain better
We will make greater efforts to explain our monetary policy in less technical and more understandable terms, so that people can see why we are taking our decisions and what that means for their lives. That will help further build people’s trust in what we do.
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Proportioning policy action to the evidence: making the monetary policy strategy of the ECB concrete