Jean-Claude Trichet: A few remarks on communication by central banks
Keynote address by Mr Jean-Claude Trichet, President of the European Central Bank, at the
25th HORIZONT Award Ceremony, Frankfurt am Main, 16 January 2008.
* * *
Ladies and gentlemen,
It is with great pleasure that I have accepted the invitation from HORIZONT on the occasion
of the 25th anniversary award ceremony. I am honoured to see so many distinguished
guests from the German media and communications industry in the audience. The
longstanding tradition that this event enjoys demonstrates that media and communications play
an important role in all aspects of modern societies, including, though perhaps more recently,
that of monetary policy. In today's address, I should like to talk about the challenges facing
central bank communication, from a central banker's perspective.
International, and, in particular, European media and many other intermediaries play a
decisive role in the process of disseminating information about the ECB's monetary policy.
Media coverage of monetary policy actions is an important channel of the ECB's
communication strategy, and thus an important factor for our policy's success. In the euro
area, currently comprising 15 member countries (with the accession of Cyprus and Malta on
1 January 2008) and beyond, national media have retained their important role in making the
central bank's actions and its objectives understood by national audiences. In my address, I
will first elaborate on how central banks in general communicate, and then explain how the
ECB addresses its audience.
How central banks communicate
It is widely accepted today that independent central banks are best placed to maintain price
stability in the economy. The Maastricht Treaty, therefore, has bestowed the ECB with full
independence in the pursuit of its mandate. In a democracy, independence must be
accompanied by both transparency and accountability to the general public. In other words, it
is the duty of independent central banks to be transparent and to communicate not only with
specialised audiences, such as financial market participants, but also with the public at large.
Transparency is multi-faceted, but basically involves making information available to each
interested party that is "relevant" for their understanding of monetary policy decisions.
Central banks' approach to communications has changed radically in recent years. About
more than a decade ago, most central bankers believed that "secrecy" about their actions
and intentions would be key to successful monetary policy.. Theoretical studies at that time
suggested that secrecy and occasional "surprises" would make monetary policy more
effective.1 Advancements in economic and monetary theory seem to have altered this
paradigm. Today, most central banks around the world accept the importance of high
standards in terms of transparency and greatly emphasise the need for clarity in their
communications. To give an example, it is common practice nowadays among central banks
- and in particular at the ECB - to inform the public about monetary policy decisions as soon
as the decision is taken. The ECB was the first to do so among major central banks in the
industrialised world. This increased transparency has contributed to monetary policy
effectiveness.
The announcement of a numerical benchmark for price stability, in particular, has proven a
powerful instrument to foster transparency by enhancing the public's understanding of the
given central bank's objectives. In its pursuit of price stability, the ECB's Governing Council,
for example, has made clear that it aims to maintain inflation rates below and close to 2%
over the medium term. By announcing a quantitative definition of price stability, the ECB has
provided a focal point for the formation of medium-term inflation expectations, "close to, but
below 2%", and has made a significant contribution to the long-term predictability of inflation
developments and monetary policy.
Central banks are prudent in their communication to always preserve their credibility in all
circumstances. Let me also say that prudence in communication finds solid justification, not
least, in the existence of a multitude of audiences with different needs.2 Effective
communication has clear benefits. First, and certainly more fundamentally, it fosters the
longterm predictability of monetary policy. This helps reduce uncertainty about inflation and the
costs associated with such uncertainty for consumers and investors. With its
communications, a central bank can influence the formation of inflation expectations, and
ensure that they remain anchored at the levels consistent with the central bank's objective.
Without firm guidance on the goals of monetary policy, market participants could lose their
point of reference which could result in them adjusting their longer-term inflation expectations
as a mere reflection of current circumstances rather than taking into account the ability of the
central bank to achieve its goal over the medium term. By contrast, in an economy in which
inflation expectations are solidly anchored, each person can make well-informed financial
decisions. A genuine understanding of monetary policy and its goal - price stability, and
therefore the preservation of the purchasing power of the euro - also creates the best
conditions for correct price and wage formation in markets, whereby all parties concerned
meet their obligations and second-round effects on wage and price setting stemming from
transitory price increases (e.g. oil, commodities, food) are thus avoided.
Second, effective communication also enhances short-term predictability.3 Through their
actions, central banks can directly control very short-term interest rates. However, given that
for consumption and investment decisions the longer-term interest rates are more relevant,
the whole yield curve is relevant for the effectiveness of monetary policy. Medium- and
longterm interest rates largely depend on private expectations regarding future central bank
decisions. Lack of effective central bank communication would eventually lead to higher,
more volatile, levels of long-term interest rates, which could be detrimental to economic
activity. By contrast, an environment in which the predictability of interest rate movements
and their relation to key macroeconomic developments is well understood supports correct
price formation in financial markets, contributes to the efficient allocation of funds, and
reduces uncertainty concerning future interest rates. In such an environment, firms can
improve their risk management and achieve better incentives to invest.
How the ECB addresses its audience
Let me turn to how the Governing Council of the ECB explains its monetary policy decisions
to the public. Our communications aim to enhance the effectiveness of monetary policy. In
this respect, the Governing Council fully subscribes to the basic principles of modern central
bank communication described earlier. A high degree of transparency vis-à-vis our monetary
policy has helped the public to hold the Governing Council accountable for its policy
decisions. Communication on monetary policy with a single voice is desirable and has been
efficiently applied from the start of monetary union.
Establishing an effective communication policy was particularly important for a young
institution that did not have its own track record, as was the case when the ECB started its
operations in 1999. The ECB operates in a multilingual and multicultural environment. We
have to address a significant number of audiences in each culture, the general public,
opinion leaders, social partners, financial markets and, of course, the media as our partners
who are key in the process of transmission of our messages to the audiences. These groups
have different expectations with regard to the quantity and nature of our communications. For
our communication policy to be effective, we have to make sure that our messages are
transmitted in a consistent and timely manner throughout the euro area, and that there is an
equal treatment of media across countries. In the presence of 23 official languages in the
European Union and 13 official languages in the euro area, it is very important to ensure that
the very same message is conveyed to citizens in all countries, and that appropriate
translations are made.
In addition to providing these translations of the ECB's official communications in all
languages spoken by the euro area countries, a number of channels are used to ensure full
respect of the single voice principle. The Eurosystem-wide external communication activities
of the national central banks are coordinated by the ECB. Due consideration has been given
to the different cultures of communication existing in the euro area. As expected, the very
diverse European national media are playing a key role in the transmission of the information
to the various audiences of the ECB. Experience so far shows that the approach works well
and that the media have contributed to a homogeneous understanding of the role and tasks
of the ECB.4
As the "porte-parole" of the ECB and its Governing Council, I think we have shown our
capacity to communicate in unison with a high level of team spirit in interaction with a highly
sophisticated and complex media network dealing with 320 million European citizens
speaking 13 languages.
It must be underlined that the European Central Bank decided from the very beginning to
embark on a bold concept of transparency. On 1st January 1999, at the moment of the start
of the euro, the state of the art of central banking was, not to say anything immediately after
each decision on monetary policy, let observers and markets guess what had been the
reasoning of the central bank and publish five or six weeks afterwards, the reasons why the
decision was made in the form of "minutes of the decision-making college". We decided from
the first day of the euro that we would have a significantly higher level of transparency.
First, we thought it was necessary to give to the public the economic and monetary diagnosis
of the Governing Council, and the reasons why the monetary policy decision was taken,
immediately after the meeting. This quasi real time display of the detailed reasoning of the
Governing Council took the form of five to six pages of "introductory remarks".
Second, we considered it to be useful to give additional explanations to the media, to market
participants and to the general public in the form of a press conference that would take place
immediately after the Governing Council and would be introduced by the "Introductory
Statement".
The ECB, in so doing, contributed to a significant change in the state of the art on
transparency of central banking. Today central banks are more often giving real time
information on their decisions, generally in the form of explanatory communiqués that are
published immediately with the decision. We remain nevertheless quasi unique amongst
major central banks in publishing a detailed analysis in quasi real time and in having a press
conference.
Why were we so keen to introduce a new and bold concept of transparency? I think we had
three main reasons:
Firstly we had to consider that we were launching a new currency to which we had to transfer
the full legacy of stability, of confidence, of credibility which was the characteristics of the
most credible previous national currencies. The Maastricht Treaty had been entirely based
upon this benchmarking concept. And our goal, in the moment of the transition, was to fully
respect the promise made to the people of the euro area namely: "The new currency will be
at least as credible and as confidence inspiring as was your own national currency." In this
perspective it was very important to explain in real time our decisions to be as clear as
possible on our diagnosis and reasoning with a view to convince observers that the new
currency deserved fully this very high level of credibility.
Secondly we also had to take into account the fact that we were issuing a new currency for
eleven countries, eleven cultures and (soon to become twelve and then later on thirteen and
fifteen today) and many languages. In this framework it was indispensable to have extremely
clear single terms of reference from the very moment of the collegial decision. Otherwise it
would have been unavoidable that various interpretations would have been given through the
grid of various cultures and different languages. Had we waited for five of six weeks to give
detailed explanations we would have been facing information and communication issues that
would have been very difficult to solve.
Thirdly, as explained before, and totally independently of the previous two reasons which are
specific to the euro area, academic research had, particularly in the 90's, made important
advances in permitting to understand better the decisive role of transparency in establishing
and consolidating the credibility of central banks and in helping them to solidly anchor
inflation expectations.
Let me tell you in concluding these short remarks, in front of so many eminent
representatives of German media, how much precisely we rely upon you for our
communication with the general public, with all our fellow citizens. It is extremely important of
course for a central bank to have an effective communication with market participants,
investors and savers in Europe and in the world.
For the European Central Bank, and its Governing Council, which is the guardian of the
currency for 320 million people, it is to the public at large that we are accountable. Therefore
communication with the general public is decisive, for it to be sure that it is well informed of
our diagnosis, our analysis and our decisions.
We met in the Governing Council last Thursday and I explained fully on behalf of the
Governing Council what are our present views and orientations.
Let me sum up the core message of the Governing Council of the ECB to our fellow citizens:
•
We are responsible for delivering price stability - namely inflation less than 2%,
close to 2% - in the medium run. It is our Treaty mandate. It is what the people
want.
• We presently have inflation higher because in particular of oil, commodities and food
price increases and the effect of indirect taxes.
•
For inflation to go down, back to our definition of price stability it is essential that we
do not have prices and labour costs spiralling taking into account the present level of
inflation and giving rise to what we call "second round effects". All decision-makers
whether private or public, including entrepreneurs and social partners should have
that in mind all over the euro area.
•
Decisions of augmentation of prices and costs that would depart from this
recommendation would do nothing but contributing to higher inflation, diminishing
purchasing power in the medium run, diminishing competitiveness and therefore
hampering durably the job creation process which is presently a major success of
the euro area.
I thank you for your attention.