Communications are an important aspect of monetary policy. Clear communications enhance transparency, which is vital for holding the central bank properly accountable, not just before Parliament but also in the court of public opinion.
So it is to be welcomed that the Bank of England has commissioned Kevin Warsh, former governor at the Federal Reserve Board, to review its communications practices. Such practices help the central bank to shape expectations, heightening the effectiveness of policy (Geraats 2002, 2014; Dincer and Eichengreen 2008, 2014). But in response to Warsh’s report (Warsh 2014), the Bank is proposing changes in its procedures that fail the transparency test (Bank of England 2014).
The Bank currently provides a drip feed of releases. First comes its monetary policy decision, a week later its quarterly Inflation Report, and with a delay of two weeks, the minutes of its Monetary Policy Committee meeting. The Bank now proposes instead to release these items all at the same time, as a single combined monetary policy announcement.
But replacing a drip feed by a deluge will make the information provided harder to digest. The result, ironically, will be to leave most observers less well informed about the rationale for monetary policy decisions. Academic researchers, and indeed the Bank itself, will no longer be able to identify the separate impact of the policy decision, the Inflation Report and the minutes by looking at how asset prices react to each, since they will all be released together.
Moreover, in order to publish the minutes along with the policy announcement, the Bank will have to alter the policymaking process in undesirable ways. The Monetary Policy Committee (MPC) currently meets on two consecutive days. Free-flowing deliberations on the first day are followed on the second day by set-piece presentations, known as “policy discussion”, in which each MPC member explains his or her policy decision. The decision supported by a majority of members is then announced on the same day, and the minutes follow two weeks later.
The Bank now proposes replacing this two-day MPC meeting with three separate meetings stretching over a week to allow the minutes to be prepared in time for the policy announcement. The genuine deliberations would take place seven days before the policy is announced and would be excluded from full transcripts to be released after eight years. The “policy discussion” would be staged three days before the policy announcement. The MPC would then vote on the eve of the big, all-in-one policy release.
Under this scheme, MPC members would be restricted in their public engagements for a prolonged period. The blackout on public statements, which starts five days before the MPC meeting and ends the day after the policy announcement, would have to be extended to 14 days. This would leave MPC members with less opportunity to explain monetary policy in speeches and interviews, perversely reducing transparency.
Moreover, new economic data, geopolitical events and developments in financial markets could significantly alter policy considerations over the course of seven days. At best, this would be inefficient, since the MPC would have to redo its deliberations. At worst, policy decisions would be distorted if MPC members, having already deliberated, disregard the new information.
Moreover, publishing the MPC’s minutes together with the policy decision is not a good substitute for a concise statement that summarises the rationale for the decision of the majority. The minutes already run to around a dozen pages. They would now cover an entire week, during which circumstances would be changing, affecting the coherence of any explanation.
Instead, the policy decision should be accompanied by a compact statement summarising the current situation and the rationale for the policy decision, as recommended by the Warsh review. Better still would be to follow Warsh’s recommendation to promptly release a three-part policy statement made up of the decision, a summary of its rationale, and individual MPC votes. When there is also an Inflation Report, it could be released shortly afterwards and presented at a press conference, so that its impact and that of the policy statement could be assessed separately. Minutes could then be published a week after the policy announcement. With these changes, the present format for MPC deliberations, the two-day meeting, could be retained.
All this would constitute a genuine improvement in transparency. By making monetary policy easier to understand, these changes would enhance its effectiveness.
The Bank of England is committing the cardinal sin of making its policymaking process less efficient, supposedly for the sake of transparency. But transparency is not an end in itself. Rather, it is a tool for enhancing accountability and, just as importantly, advancing the ultimate goal of making monetary policy more efficient and effective.
Bank of England (2014), “Bank of England Announces Measures to Bolster Transparency and Accountability,” press release, 11 December.
Geraats, P (2002), “Central Bank Transparency,” Economic Journal 112, F532-F565.
Geraats, P (2014), “Monetary Policy Transparency,” in J Forssbaeck and L Oxelheim (eds), The Oxford Handbook of Economic and Institutional Transparency, Oxford: Oxford University Press.
Dincer, N and B Eichengreen (2008), “Central Bank Transparency: Why, When and with What Effects,” in J-P Touffut (ed.), Central Banks as Economic Institutions, Cheltenham: Edward Elgar.
Dincer, N and B Eichengreen (2014), “Central Bank Transparency and Independence: Updates and New Measures,” International Journal of Central Banking 38, pp.189-253.
McKeown, Jack and Lea Paterson (2014), ‘Enhancing the transparency of the Bank of England’s Inflation Report’, VoxEU.
Warsh, Kevin (2014), “Transparency and the Bank of England’s Monetary Policy Committee”.