A FORWARD GUIDANCE INDICATOR FOR THE SOUTH AFRICAN RESERVE BANK: IMPLEMENTING A TEXT ANALYSIS ALGORITHM

Abstract The expansion of central bank communications and the increased use thereof as a policy tool to manage expectations have led to an area of research, semantic modelling, that analyses the words and phrases used by central banks. We use text-mining and text-analysis techniques on South African Reserve Bank monetary policy committee statements to construct an index measuring the stance of monetary policy: a forward guidance indicator (FGI). We show that, after controlling for market expectations, FGIs provide significant explanatory power for future changes in the repurchase interest rate (the primary monetary policy instrument). Their out-of-sample predictive power is, however, weak. Furthermore, we show that FGIs are primarily driven by inflation expectations, which highlights the strong link between the SARB’s communication strategy and its inflation targeting mandate. In fact, we observe a systematic anti-inflation bias in the communicated stance of monetary policy—both absolutely and asymmetrically. Overall, Monetary Policy Committee (MPC) statements reflect relevant information on the inflationary stance and policy decisions of the South African Reserve Bank (SARB), but, since forecasts are conditional on current information, they provide unreliable forward guidance. Given this finding, MPC statements should emphasize the conditional nature of the SARB’s stance, and what that implies for the future path of the policy rate.