Clear central bank communication key to anchoring inflation expectations: Study
During the discussion, speakers noted that Bangladesh Bank largely relies on press releases to disseminate information, which are often difficult for the general public to understand.
Clear and transparent communication by central banks plays a crucial role in stabilising inflation and strengthening the effectiveness of monetary policy, according to a study presented at the 9th SANEM Annual Economists Conference held at BRAC Centre Inn.
The three-day conference began on Friday and concludes tomorrow (19 April). Today, on the second day, the paper titled "The Role of Central Bank Communication in Shaping Inflation Anchors: A Taylor Rule Perspective" was presented.
The session was chaired by Zahid Hussain, former lead economist at the World Bank's Dhaka office, while Abdullah Shihab, joint director at the Bangladesh Investment Development Authority (Bida), joined as the discussant on the paper.
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The paper was presented by Md Julker Naim, deputy director at Bangladesh Bank.
Using data from 2000 to 2023, the study finds that clear and open communication helps economic agents better understand future inflation trends. It reduces uncertainty, stabilises interest rates and helps keep inflation under control, while also building trust in central banks.
"Central banks aim to keep inflation stable, which supports smooth economic growth," Julker Naim said.
"Clear and honest communication helps guide expectations, reduces uncertainty and builds trust. Poor communication, on the other hand, can create confusion and worsen inflationary pressures," he added.
Julker also stressed the importance of institutionalising forward guidance within the policy framework to reduce interest rate volatility and improve predictability.
The study concludes that forward-looking and transparent communication helps keep inflation near target levels and enhances central bank credibility.
During the discussion, speakers noted that Bangladesh Bank largely relies on press releases to disseminate information, which are often difficult for the general public to understand. They emphasised that communication should be simplified to make it accessible to a wider audience.
Commenting on the paper, Zahid Hussain raised concerns about causality.
"I think good communication leading to stable inflation and interest rates may not be the full story," he said.
"It could also be the case that central banks communicate more effectively when the economy is already stable," he added.
He cited the challenges faced by the Federal Reserve, noting that rising inflation, market expectations of rate cuts and political pressures have created a complex policy environment.
"In such situations, the question is whether communication alone can stabilise the economy, or whether its effectiveness weakens precisely when it is most needed," he said.
Participants also noted that central banks in advanced economies, including the European Central Bank, place greater emphasis on communication as a policy tool.
In contrast, Bangladesh still has scope to improve in making its communication more transparent, inclusive and user-friendly.
