Central Banks should embrace the revolution; the public should drive it!

For most of the history of central banks, opacity has been deeply ingrained in their psyche. In 1988, former Chair of the Federal Reserve once noted, “I guess I should warn you, if I turn out to be particularly clear, you‘ve probably misunderstood what I said”. At the time, central banks were never to be understood by anyone in the public, they were secretive and highly technical in their language. This prevailing quintessence was perhaps, well captured by the job description provided to the Bank of England’s first press officer: “keep the Bank out of the press and the press out of the Bank”. At the time, central banking was a mystery and central bankers guarded this mystique as essential to their success. However, change is the only constant. Although central banks across the world were content by their mysterious and secretive nature, change caught up with them, and it shook their core reason for being opaque. As a result, there has been a revolution. The revolution? An increasing need for central banks to be transparent, engage and communicate to the public their actions, and earn the trust of economic agents (the public) and be accountable. Indeed, after the 2007/8 crisis, many central banks decided to use communication as a policy tool; forward guidance is a case in point. Post the financial crisis, central banks in advanced countries struggled with ensuring macroeconomic stability through traditional tools, and in effort to manage expectations of economic agents (the public) during a highly uncertain environment, they introduced forward guidance as a policy tool. Forward guidance essentially means, providing information about the central bank’s future monetary policy intentions, based on its assessment of the outlook for price stability. Provision of clear communication about the future monetary policy intentions helps to manage the expectations of economic agents by helping agents such as banks, financial market participants, businesses and consumers to have a better understanding of economic developments, like how borrowing costs are likely to develop in the future, preventing any irrational economic behavior and ensuring stability. Despite recent efforts by central banks to be transparent and communicate with the public however, there remains many challenges. Many in the general public would still consider central banks to be opaque and secretive, which is true, because assessing closely how central bank communications has evolved, much of it, rather than focus on the general public, now focusses on what one may call, MEN; Markets (M), Economists (E) and News (N). In contrast, it is the public who, make decisions about spending and saving in the economy and it is the public who decide, ultimately, whether central banks are serving society well or poorly. According to a survey by Robert Shiller on public attitudes towards inflation, “there is still a very big communications gap between economists and the public”. For example, it has been established that more than half of the general public in advanced countries do not know who sets interest rates and around a half have either never heard of the Central Bank’s Monetary Policy Committee or think it is part of government. I have not done a survey but would argue that this gap is larger in a developing economy like Rwanda. It is important to note that today, public language has changed. It is shorter, sharper, with higher impact and wider reach. Technical language is therefore likely to bring about mystique and mistrust. This puts an even great burden on institutions such as central banks, charged with a technocratic task, to speak in words that resonate with the public. Studies assessing the complexity of central bank communication relative to other publications such as newspaper and political speeches revealed that on average, central bank publications require a high reading grade scores around 14 above the levels of external publications. In linguistic complexity terms, there exists a reading grade gap between central bank and external publications, of around 5 years with mainstream newspapers, eight years for political speeches generally and 13 years for election campaign speeches by President Trump. Indeed, it is true that central banks occupy a technocratic space with its own technical language, but is important to point that the costs at which this complexity comes may be immense. For example, what fraction of the public are central bank publications excluding because of their language? To reach that wider audience therefore, central banks will require new techniques. First is that central bank communication will have to be redefined. It is true that communication means more mouths, but to fully involve the public in policy making processes it will require conversation than communication; conversation means ears as much as mouths. Communication will need personalised and localised stories than just hard data forecasts. As the saying goes - It takes two to tango, central bank engagement will require more listening as much as speaking, understanding of the public as much as public understanding, a two-way process. Central banks will need an improved understanding the concerns and the constraints of the public, their degrees of understanding and distrust, their appetite for information and their preferred means of receiving it. They will need to change their language, to increase penetration and reach. Simple words can make a great difference to readability. “Inflation and employment” leaves the majority of the public cold. “Prices and jobs” warms them up. “Annuity” freezes the public, while “investment” defrosts. To be a two way process, the public also has a role to play. The public will need to actively engage central banks, air out their grievances and make themselves heard. Recently we have seen central banks open up, creating channels through which the public can reach out and communicate their views and concerns. Initiatives such as #ASKDraghi at the European Central Bank, #ASKBoE and #EconMe at Bank of England, in Rwanda, BNR recently launched #BNREngage as a channel through which the public can interact. It is therefore important that the public take advantage of such platforms. The National Bank of Rwanda will this year transition into a new monetary policy framework, from Monetary Targeting to a Price Based Monetary Policy Framework. Expectations of economic agents and how well BNR can manage them will be key for the success of policy under the new framework. BNR will therefore need to embrace the revolution of transparency and evidence at hand, with channels like BNREngage, the bi-annual Monetary Policy and Financial Stability Statement and the quarterly press conferences and releases on policy decisions, show that BNR is open to the challenge. The ball is now in the court of the public, to take on the task and drive the revolution - actively engage BNR. The writer is an Economist in the Monetary Policy and Research Department at the National Bank of Rwanda. The views expressed in this article are of the author.

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Central Banks should embrace the revolution; the public should drive it!