OPENING ADDRESS DELIVERED
AT
THE 2017 CONTINENTAL SEMINAR OF THE ASSOCIATION OF AFRICAN
CENTRAL BANKS (AACB)
BY
DR JOHNSON P. ASIAMA
SECOND DEPUTY GOVERNOR, BANK OF GHANA
THEME: CREDIBLE COMMUNICATION STRATEGIES OF CENTRAL BANKS
IN THE FRAMEWORK OF MONETARY POLICY AND FINANCIAL STABILITY
AT
MOVENICK AMBASSADOR HOTEL
ON
MAY 03, 2017
Mr. Chairman,
The Executive Secretary, AACB,
Facilitators on the theme & sub-themes,
Technical Experts from our respective Central Banks
Distinguished Guests,
Ladies and Gentlemen,
Introduction
1. It is a pleasure to join you at this all important Continental Seminar of the
Association of African Central Banks (AACB). I wish to first thank the AACB for
choosing Ghana as the host and also warmly welcome all delegates, especially the
first time visitors.
2. Mr. Chairman, I consider the sub-theme for this seminar session, "Credible
Communication Strategies for Central Banks in the Framework of Monetary Policy
and Financial Stability," timely because of the emerging role of communication as
a tool to shape expectations towards achieving the core mandate of price
stability. Therefore, my opening remarks will briefly touch on monetary policy
formulation in Africa and the move towards incorporating communication in the
monetary policy formulation process.
Monetary Policy in Africa
3. Mr. Chairman, Africa is a continent of developing and emerging economies
therefore policies are broadly aimed at promoting economic growth, poverty
reduction and development. In the recent past, most African central banks
assumed developmental roles by directly intervening in the real sector of the
economy. With this role, monetary policy formulation in the early 1970s was
directed at financing large fiscal deficits incurred in the pursuit of accelerated
growth and development. The monetary accommodation of fiscal deficits and in
some instances direct controls on interest and exchange rates resulted in severe
financial repression.
4. The independence of central banks then was largely non-existent and government
economic policies were mostly directives for state institutions, including the
central bank. Central bank communication was limited to regulatory and
supervisory guidelines issued periodically to financial institutions under its control.
Economic agents seeking information had to depend on ex-post publications to
conjecture the stance of monetary policy pursued during the course of the year.
5. Mr. Chairman, with paradigm shifts on monetary policy making in the global
economy, it became clear that the direct instruments were not only devoid of
market or price signals but also distortionary in the allocation of resources. The
prevalence of state-owned banks in Africa at the time further perpetuated such
distortions as political directives informed the allocation of financial resources to
the economy. Thus, there was the need to move away from the direct control to
market-based regimes introduced in the late 1980s under the structural
adjustments and financial sector liberalization policies pioneered by the IMF and
World Bank.
6. These had significant impact on the economies of most African countries.
Financial markets have deepened with innovative products alongside increasing
integration of African markets to the global financial markets.
7. As time progressed, it became imperative for African central banks to pursue
forward-looking monetary policy to tackle price stability which is a necessary
condition for sustainable growth. In so doing, some of our members such as
Ghana, South Africa, and Uganda adopted the Inflation Targeting monetary policy
framework, while other central banks de-emphasized the role of monetary
aggregates and started incorporating elements of forward-looking monetary
policy frameworks.
8. Mr. Chairman, forward-looking monetary policies can only be effective if the
central bank is able to shape inflation expectations of the public to align with the
medium term inflation target. To do this, the central bank needs to be
transparent with regard to the monetary policy objective and provide a clear
policy direction on how to achieve it. Communication and transparency helps
shape and anchor inflation expectations as well as build policy credibility towards
delivering the core mandate of the central bank.
9. In the case of financial stability, central bank communication strategy should be
developed with utmost care in order not to incite unnecessary and unintended
reaction from the market. There is therefore the need to maintain a delicate
balance between transparency and accountability on one hand, and the
probability that the information being communicated could unsettle markets. A
transparent and credible communication strategy is feasible in a context of a
stable market underpinned by effective regulatory and supervision regime.
Central Bank Communication and Challenges
10. Mr. Chairman, transparency and policy credibility that underpin forward-looking
monetary policies and market-based prudential regulations call for effective
central bank communication. To quote the Deputy Governor of the Federal
Reserve Bank of New Zealand, "central banks' pronouncements have economic
and social impact". Therefore, central bank communication strategies must be
underscored by accountability and transparency. This involves deepening
understanding of economic relationships and their ultimate impact on inflation,
and signalling monetary policy actions which provide forward guidance to market
participants.
11. It is for these reasons that communication has become an additional tool in the
kitty of the central banker. In several instances, central banks communicate
interest rate policy decisions, risk assessments of inflation horizon and changes in
inflation forecasts relative to the actual outturns. These are all intended to shape
expectations and build credibility in the delivery of the central banks' mandate.
12. However, communication in some African countries faces some challenges. As
democratic processes take root alongside media pluralism and the explosion of
social media, there is a potential for central bank actions and inactions to be
misrepresented and in the process, erode the central bank's reputation and lower
market and public confidence in monetary policy decisions.
13. As central bankers, we must appreciate new communication trends and develop
communication strategies to leverage existing media technology to build
confidence of market players. African central banks should also develop a
framework for comprehensive education packages to improve financial literacy
across all the sectors of the economy. This will enhance market appreciation of
monetary policy decisions and central bank actions for appropriate response.
Monetary Policy Credibility
14. Mr. Chairman, monetary policy credibility is crucial for attaining monetary policy
objectives, particularly, in a rational expectations environment where economic
agents have full information on how the economy works. It is a solution to the
time dynamic inconsistency problem, where the expectations of economic agents
are shaped by the actions or inactions of the central bank in the delivery of its
mandate. In Africa, the time dynamic inconsistency problem is made worse by
fiscal dominance and inadequate central bank operational autonomy.
15. Monetary policy credibility in several advanced economies has been the
cornerstone for anchored inflation expectations, and lower variability of monetary
policy outcomes as market participants believe the central bank's commitment to
achieving its policy objectives. However, it should be noted that credibility does
not preclude flexibility. In the pursuit of policy credibility, the central banker
should also have the flexibility to adjust previous commitments in the face of
internal and external shocks that may shift the realisation of policy objectives.
16. There is the need to build monetary policy credibility, especially in a number of
African central banks to support monetary policy making. Efforts must be made to
remove both technical and political constraints which are pervasive within the
African central banking context. Some of these technical constraints include data
unreliability and untimeliness with monetary policy decision or forecasts, over-
optimistic policy objectives, and uncontrollability of policy instruments.
17. Political constraints such as inadequate legislation to back the operational
independence of the central bank also hinder policy credibility. Addressing these
constraints would require financial and technical support to state institutions that
generate the economic and financial data, and constitutional, legislative and
operational reforms to strengthen monetary policy formulation.
18. Mr. Chairman, going through the programme for this seminar, I have no doubt
that much will be learned to greatly enhance communication in our respective
central banks. I urge all of you participants to note the important take-away
points from this seminar. For example, how does effective communication
enhance central bank credibility and effectiveness of monetary policy? How
should we manage communication in times of crisis? And what lessons should we
learn from cross-country experiences in central bank communications?
19. Mr. Chairman, these foregoing remarks are just a few pointers to set off the
discussions on the topic. I do hope that by the end of this seminar, the
presentations and detailed discussions will deepen our understanding of central
bank communication and monetary policy credibility. On this note, let me once
again thank the Executive Secretariat and the Planning Committee for putting this
seminar together.
20. I wish you all fruitful discussions. Thank you.