The Announcement of Monetary Policy Intentions

Abstract

Whether a central bank should share with the public its views about the future evolution of short term interest rates is an unresolved issue. Disclosing this information might allow a more precise control of market expectations and a more effective achievement of the ultimate goals of the monetary authority. Yet, if the public do not understand the conditional nature of this forecast, it could also undermine the credibility of the central bank. We provide new evidence on the effects of this announcement on private expectations about future short term interest rates. The communication of policy intentions tends to be associated with a greater predictability of monetary policy decisions. Moreover, focussing on New Zealand, where the central bank releases interest rate projections, we find that market expectations react significantly and persistently to the unexpected part of such forecasts. Finally it emerges that the predicted component of the changes in these projections is large, suggesting that market operators understand their conditionality.