Amando M Tetangco, Jr: The role of communication in ensuring effective
central banking
Keynote address by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the
Philippines (Bangko Sentral ng Pilipinas), at the Second IMF Regional Seminar on Central
Bank Communications, Makati, 8 July 2007.
* * *
Mr Ariyoshi, Mr. Reza Baqir, members of the BSP Monetary Board, distinguished speakers,
fellow central bankers around the region, other officers of the IMF, good morning. On behalf
of the Bangko Sentral ng Pilipinas, I bid our guests a warm welcome to our country!
You have traveled far for this Second IMF Regional Seminar on Central Bank
Communications. This conveys, in very strong terms, the significance you attach to the role
of communication in ensuring effective central banking.
No doubt, the sea changes in global finance and markets as well as in the domestic
macroeconomy have posed significant effects in the conduct of monetary policy. In particular, we
have seen the rapid evolution of monetary policy towards increased transparency. I share the
general observation that secrecy or deliberate obfuscation are no longer the buzzwords in
central banking circles.1
In sharp contrast to the past practice of reticence among monetary authorities, greater
emphasis on effective communication is now a best-practice policy among central banks
around the world. In fact, in the last two decades or so, we were witness to an expansion in
disclosure mechanisms employed by central banks. Moreover, there has been a dramatic
change in the nature and quality of information that monetary authorities are now willing to
disclose.
This morning, I will share some of my thoughts on central bank communication in general
and provide you with an overview of the communication strategy that we employ at the
Bangko Sentral, with focus on our framework for communication with other government
agencies.
I. The importance of central bank communication
The move toward greater transparency is a key element of good corporate governance.
Central banks have become increasingly independent so there is scope for greater
accountability. After all, a central bank is a public office whose policy decisions have an
important bearing on the direction of the economy.
Thus, the central bank should be able to clearly define its goals and provide a compelling
explanation behind its policy actions. In turn, transparency allows for an honest assessment
of central bank performance, given the goals it has pledged to achieve.
The emphasis on better transparency practices also recognizes the idea that transparency
makes monetary policy generally more effective, in part by ensuring that market expectations
are formed efficiently.
As central bankers, we are aware that the potency of monetary policy actions can be
strengthened if markets understand the overall intention behind the central bank's policy
decision and the results it expects to achieve.
Indeed, the emergence of "open mouth" operations as a policy tool outside of the traditional
channels of monetary policy has been recognized by central bankers.
As pointed out by Ehrmann and Fratzccher (2005): "Central banks have direct control over a
single interest rate, usually the overnight rate, while their success in achieving their mandate
requires that they are able to influence asset prices and interest rates at all maturities" .
In the case of the Bangko Sentral, we typically adjust our overnight policy rate, when
necessary, by increments of as low as 25 basis points. If we really think about it, we do not
expect that such a marginal adjustment in a very short-term instrument will do the job for us.
Rather, we rely on the markets to interpret our signals properly and allow for appropriate
adjustments in the prices of financial assets that really matter, including the longer-term
tenors.
In general, central banks now avoid surprising the market since this could generate
unwarranted volatility. This is where communication comes in: it increases the predictability
of policy decisions and helps the market anticipate how the central bank might react to a
particular situation, event or development. Indeed, good transparency practices promote
greater market efficiency.
For an inflation targeting central bank such as the Bangko Sentral, communication is crucial
in anchoring inflation expectations. To help guide public expectations, it is incumbent upon
an inflation targeting central bank to disclose its outlook for future inflation. Managing the
expectations channel is, therefore, critical.
Apart from influencing the market with its policy actions, communication also allows the
central bank to obtain useful feedback from its stakeholders, which in turn is an important
input to policy formulation.
Given these arguments in favor of communication, the next critical issue is the extent of
transparency. How transparent should central banks be?
My view is that central banks should take a pragmatic approach to communication. While
transparency is a good policy, excessive transparency could hamper the effectiveness of
monetary policy and potentially harm market stability.
Specifically, extensive disclosure requirements about internal policy discussions on money
and exchange market operations might disrupt markets, constrain frank discussion by
policymakers, or prevent adoption of contingency plans.
In other words, good transparency practices should allow for flexibility to take into account
country-specific circumstances. After all, there is no one-size-fits-all formula for central bank
communication.
II. Communication between the central bank and other government agencies
Let me now turn to the importance of communication between the central bank and other
government agencies.
While most central banks enjoy independence from other branches of government,
continuing coordination with other government agencies for macroeconomic policy
formulation remains an imperative. Inter-agency arrangements should be in place to ensure
consistent and coherent economic policies. After all, monetary and fiscal policies, along with
other government policies, are interlocking elements of the country's overall macroeconomic
strategy.
The consensus among economists and policymakers is that well-coordinated policies are
integral to durable, broad-based and strong economic growth. As such, fiscal and monetary
authorities, as well as other economic managers in government, should share information
and be aware of their agencies' respective policy intentions and decisions. A silo approach to
government policy formulation, where one agency formulates policy on its own without
consultation, does not and will not work.
In fact, the absence of coordination among policymakers could undermine the credibility of
the country's macroeconomic policy. As Worrell (2000) argued in his paper: "the invariable
consequence of any appearance of conflict among the authorities is an increase in
uncertainty in financial markets, a loss of credibility of macroeconomic policies and an
increased probability of price and output instability". Thus, good communication with other
economic managers is of prime importance in macroeconomic management.
The same principle applies in the field of financial supervision. Even in central banks with
financial supervision functions such as the Bangko Sentral, jurisdiction over the financial
sector is often shared with other government supervisory agencies. In the Philippines, for
instance, supervision over non-bank financial institutions without quasi-banking functions is
shared by the Bangko Sentral, the Securities and Exchange Commission and the Insurance
Commission. This underscores the need to maintain close coordination among these
agencies to ensure consistency of policies, as well as access to timely and accurate
information.
An important caveat in communication between the central bank and other government
agencies is the responsibility to respect the confidentiality of sensitive information being
shared.
III. The BSP's communication strategy
The Bangko Sentral, like many other central banks, continues to enhance its communication
strategy to reach all its stakeholders. Our adoption of inflation targeting in 2002 served as an
additional stimulus for us to work on improving our transparency practices.
In dealing with the press and the market, the Bangko Sentral employs a wide range of
disclosure mechanisms. One of these mechanisms is the BSP website which carries our
press statements, statistical releases and our advocacies.
In the area of monetary policy, a press statement is issued immediately after each monetary
policy meeting. Typically, each policy statement contains the reasons behind the Monetary
Board decision, along with a brief discussion on the outlook for future inflation.
The highlights of our policy meetings are also made public after a predetermined lag of four
weeks. The highlights were initially published with a lag of six weeks but we shortened it to
four weeks, beginning July last year, to further improve transparency in monetary
policymaking.
We also publish a quarterly Inflation Report to document the rigorous economic analysis
behind the conduct of monetary policy and inform the public of the overall thinking behind our
decisions. The release of the Inflation Report for each quarter is accompanied by a briefing
for the media and market analysts.
In cases of a breach of the inflation target, the BSP issues an open letter to the President to
account for the reasons behind it and to outline the actions that will be undertaken to bring
inflation back to the target range.
Further, we conduct public information campaigns across the country to foster better
understanding and support for the central bank's policies and programs. The Bangko Sentral
also conducts regular dialogues with the press and periodic engagements with its various
constituencies.
In the Philippines, the generation of macroeconomic assumptions and formulation of
government's medium-term budget strategy is done by the Development Budget
Coordinating Committee, which is composed of the Department of Budget and Management,
and the Department of Finance, the National Economic and Development Authority and the
Office of the Executive Secretary. The BSP used to be a member of this committee but, in
recognition of its administrative and fiscal autonomy, was re-assigned as a resource
institution.
Under the inflation targeting framework, the inflation targets are set by the Committee in
coordination with the BSP. This effectively commits the Government as a whole to the
inflation target. Equally important, this ensures that our monetary policy actions remain
consistent with the Government's economic policy agenda, even as we maintain our
independence.
In the field of financial supervision, the Bangko Sentral has cooperative arrangements with
other financial regulators. Among others, the Bangko Sentral chairs the Financial Sector
Forum which includes the members of the Securities and Exchange Commission, the
Insurance Commission and the Philippine Deposit Insurance Corporation It focuses on three
broad areas: harmonization of supervisory and regulatory policies in the Philippine financial
system; information exchange; and consumer education or financial literacy.
In addition, the Bangko Sentral is in various stages of negotiations with foreign supervisory
authorities for the adoption of minimum ground rules on information sharing involving
crossborder financial institutions under their supervision . Through this initiative, we hope to
strengthen cooperative arrangements with our foreign counterparts.
Another important dimension of our interface with the government is our interaction with the
Executive and Legislative branches of Government. As mandated in our charter, we submit
regular reports to the President and both houses of Congress. These include a report on
economic and financial conditions, a report on the central bank's financial condition, and a
review on the state of the Philippine financial system. The BSP is also required by law to
report to the President and Congress any unusual movements in monetary aggregates,
credit and price levels, as well as the remedial measures undertaken by the Bangko Sentral
to correct them.
In addition, the Bangko Sentral engages in a variety of informal interactions with the other
branches of government through appearances in committee hearings in both houses of
Congress and its participation in various government inter-agency committees and working
groups.
In other words, we invest time and resources to communicate our policies and programs with
other branches of government.
IV. Concluding remarks
This IMF seminar, therefore, comes at an opportune time when central bank communication
has emerged as a potent policy tool, rather than a mere channel to transmit information. As
an institution that recognizes the significance of communication in making our operations
more effective, we at the Bangko Sentral are pleased to co-host this Second IMF Regional
Seminar on Central Bank Communication.
This seminar should build on the IMF's initiative, which started in Mumbai, to provide a forum
to discuss emerging issues in central bank communications and gain insights from one
another's experiences.
We thank the IMF and their representatives who are here with us this morning...for setting up
this forum for central bank communication in this region.
Finally, I wish this seminar on central bank communication will be fruitful and highly
successful, not only in terms of generating fresh perspectives but also in fostering regular
exchange and cooperation among the participants.
Have a wonderful stay in our country. Thank you and Mabuhay!