Communications in Central Banks: A Perspective

Communication in central banking has become a very serious matter. Not long ago central banking was shrouded in mystery: decision making was seldom transparent and communication with financial markets minimal. Now central banks influence the economy as much through management of expectations as through policy actions. The need for increased central bank communication has been influenced by a number of developments. As central banks have become more independent, transparency and accountability of their actions has become more important. Further, with the weight of traditional banking declining in the financial sector, monetary policy transmission takes place more through impersonal financial markets which requires greater communication. The task of central banks has become more complex as the objective of financial stability is added to those of inflation targeting and economic growth. The more complex the mandate of central banks becomes the more important the role of communication. The Reserve Bank of India has such a complex mandate requiring clear communication with financial markets and the public. It does this through policy announcements, reports, regulatory communications, technical advisory committees, and interactions with the media. Transparency in operations is maintained through its website. Despite these communication channels, the Reserve Bank has experienced difficulty in maintaining effective communication: as it acted to curb financial excesses during the period prior to the recent global crisis, for example, there was little understanding of its actions. As central bank operations become more complex, other central banks will face similar problems. Complex policy statements are often regarded as non-transparent, as markets, analysts and the public have become accustomed to simple objectives and statements. Simplicity has become confused with transparency. Thus central banks will face new communication challenges in the near future.