April 5, 2018 / 3:38 PM / a year ago

Breakingviews - Quest for central bank transparency has limits

The Bank of England in the City of London.

LONDON (Reuters Breakingviews) - There is no such thing as too much information for some central bank watchers. They will be cheered by the idea that the Bank of England’s rate-setters may be debating the merits of greater openness. But more information does not always translate into more insight.

Policymakers at the UK central bank are discussing whether they should be more forthcoming about their policy plans, the Financial Times reported on Thursday. Options include more candid discussions and issuing official forecasts for interest rates. For a central bank that already divulges a lot of its thinking, there may be little point.

The Bank of England issues minutes of its policy meetings and a breakdown of the votes at the same time as it publishes the outcome of the deliberations. Its quarterly inflation report sheds even more light on concerns and expectations for the future. And its nine rate-setters regularly deliver speeches and answer questions from the public and media.

True, the central bank’s economic forecasts, which shape investors’ expectations of future monetary policy, are based on the path of policy rates implied by forward market interest rates rather than its own estimates. By necessity, Bank of England economists have to take a snapshot, even though market prices move continuously. Traders’ expectations may therefore have changed substantially by the time the forecasts are actually published.

Moreover, other central banks have made different choices. The U.S. Federal Reserve, for example, issues a so-called dot plot that shows individual rate-setters’ interest rate expectations without identifying them by name. But investors are fully aware that these are far from concrete guarantees of how things will pan out.

In normal times, good rate-setters change their thinking when the economic environment does rather than giving cast-iron pledges about future plans. It’s true that the best ones resorted to giving such assurances in the aftermath of the financial crisis, when they had driven policy rates to zero or below and had limited ammunition left to fight off the risk of deflation. But they are less likely to do so now that economic activity and inflation are picking up. The quest for ever more transparency is a search for certainty that monetary policymakers cannot offer.


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