No. 720 - The announcement of monetary policy intentions

Whether a central bank should share with the public its views about the future evolution of short term interest rates is an unresolved issue. The disclosure of this information might allow a more precise control of market expectations and a more effective achievement of the ultimate goals of the monetary authority. However, if the public does not understand the conditional nature of this announcement, it could also undermine the credibility of the central bank. We provide new evidence on the effects of this type of announcement on private expectations about future short term interest rates. Our results suggest that the communication of policy intentions, either in its qualitative or quantitative form, tends to be associated with a greater predictability of monetary policy decisions. Moreover, analyzing the experience of New Zealand, we find that market expectations show a significant and persistent reaction to the unexpected component of the interest rate projections released by the central bank. Finally, it turns out that the predicted component of these projections is large, an evidence which suggests that market operators understand their conditionality.