Monetary policy communication needs improving

Michael Lloyd

July 12, 2019

The Monetary Policy Committee (MPC) should rethink and change how it predicts and communicates interest rate changes according to external MPC member Gertjan Vlieghe (pictured).

In his latest speech at Thomson Reuters entitled ‘Continuous Improvements in Communicating Monetary Policy’ he explained that currently, the MPC publishes a forecast of what it thinks is likely to happen to growth and inflation given a path of interest rates determined externally.

That path of interest rates can sometimes result in a forecast that has inflation returning to target, but this is not always the case.

Vlieghe said: “If we want people to understand what we, the MPC, think is the necessary path of interest rates to achieve the inflation target, why not just tell them?

“Why complicate matters by telling them that if we followed some other path of interest rates, it may not result in achieving the inflation target? Yet our current approach to communications is precisely that.

“We communicate about what we think we may do, by showing you a forecast of what will happen if we do something else.

“Before diving into the details of the argument I want to stress that a far bigger challenge to monetary policy is that the future is uncertain, and my suggested communications improvement will not change that.”

Vlieghe added: “Today’s preferred path of interest rates will change tomorrow, if the economy turns out differently from what we expected.

“But I am arguing that we can achieve a modest improvement in the understanding that businesses, households and financial markets have of what our objectives are, and what we think we need to do to meet those objectives.

“Over time, that improved understanding should make it slightly easier for us to meet our objectives in the first place.”

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