Jean-Claude Trichet: Communication, transparency and the ECB's monetary
policy
Keynote speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the New
Year's reception of the International Club of Frankfurt Economic Journalists, Frankfurt, 24 January
2005.
* * *
Ladies and gentlemen,
It is a great pleasure to be here at the New Year's reception of the International Club of Frankfurt
Economic Journalists. This is certainly the right place for me to discuss the "art of external
communication". The members of this club are among the most experienced and knowledgeable
watchers of the ECB. Through your reporting you play a decisive role in our communication policy.
Along with other media you have the important responsibility of informing the public about the
Eurosystem's monetary policy as well as other central banking activities and of contributing to a
constructive public dialogue on our policies.
Much has been said about the external communication of central banks in recent years and central
bankers have reflected intensively on their external communication. Transparency, candid
explanations given to investors, savers, market participants, households and, last but not least, to our
306 million European fellow citizens are of the essence for the ECB and its Governing Council. It is fair
to say that communication is an integral part of monetary policy.
Why are accountability and transparency so important for monetary policy?
Over the last few decades, it has been widely recognised that the maximum degree of independence
for central banks, together with a clearly defined mandate, is the best way to ensure time consistency
in the implementation of monetary policy and therefore to guarantee stable prices. Consequently, the
Maastricht Treaty has granted the ECB full independence in the pursuit of its mandate. In a
democracy, transparency and accountability are the quid pro quo for that independence. In other
words, it is the duty of independent central banks to be transparent and to communicate. We help to
make the ECB accountable by explaining our objectives and decisions to the general public, to the
people of Europe, its elected representatives - namely the European Parliament - and to the
professionals in the financial markets.
But transparency is not only a duty for a central bank. It is clearly also in the bank's own interest to
embark on an effective communication as it contributes considerably to the efficiency of its policies.
This helps to anchor the inflation expectations of the financial markets and the public. Through efficient
communication we can reduce inflation uncertainty and the costs associated with such uncertainty for
consumers and investors. Therefore it has immediate economic benefits for society. We achieve this
by being clear about our strategy, clear about our definition of price stability and by being transparent
in our actions. The economic agents and the public need to be convinced that the central bank's
monetary policy decisions are consistently focused over time on achieving the announced aim.
In a market-based economy the central bank can directly influence only short-term interest rates
through its monetary policy instruments. However, consumption and investment decisions, and thus
medium-term price developments, are to a large extent influenced by longer-term interest rates, which
depend on private expectations regarding future central bank decisions and future inflation. It is
important that these developments in longer-term rates support the objective of maintaining price
stability over the medium term. This in turn requires that the central bank is regarded as credible and
predictable. A central bank which does not succeed in communicating the principles underlying its
monetary policy and is perceived as acting in a non-systematic, discretionary manner will over time
endanger its reputation.
Therefore, the central bank's communication should ensure that markets understand the systematic
responses of monetary policy to economic developments and the current assessment of the central
bank. Successful central bank communication supports predictability and correct price formation in
financial markets, contributes to efficient allocation of funds and reduces uncertainty about future
interest rates. In an environment where the predictability of interest rate movements and their relation
with key macroeconomic developments is well understood, firms can better manage their balance
sheets. This reduces both their vulnerability to economic shocks and their risk management costs and
creates the conditions for better investment decisions.
Finally, transparency contributes to macroeconomic stability and long-term growth by enhancing the
price and wage setting mechanism, and by improving the functioning of the labour market. A credible
monetary policy strategy oriented towards price stability contributes to moderate nominal and real
wage developments. Workers do not have to ask for extra wage increases to compensate for inflation
risk and firms know beforehand that they will not be able to pass higher wages on to consumer prices.
Overall, transparent and credible monetary policy enhances firms ability to manage their production
costs, retain profitability and create new jobs.
Transparency of the ECB
Let me now turn to the ECB and its concept of transparency and external communication. It was
understood at an early stage that external communication would be crucial for the ECB. Already during
the time of the European Monetary Institute the ECB's future communication policy was discussed;
consequently, the ECB's Governing Council adopted some communication policy objectives and
principles as early as 1998. They reflect the duty and "self-interest" elements already mentioned: since
then we have communicated to enhance the effectiveness and efficiency of our monetary policy and to
make the ECB, an independent central bank, accountable.
On this score, the publication of the key elements of the monetary policy strategy back in October
1998 constituted in itself a major step towards monetary policy transparency. One element of the
strategy is to quantify what the ECB is aiming at in terms of price stability, namely an increase in
consumer prices of below, but close to, 2% over the medium term. This provides guidance for inflation
expectations. At the same time, it serves the purpose of accountability, for it sets a benchmark against
which the ECB's performance in maintaining price stability can be measured. The ECB's monetary
policy strategy also provides a clear and coherent framework for structuring analysis and our
discussion in the Governing Council, and it has a remarkable role in structuring our external
communication. From the start, it has helped to achieve the consistency between internal analysis and
external communication which is the essence of transparency.
It is also important for the ECB and the Eurosystem to clearly communicate what monetary policy can,
and cannot, achieve. For example, monetary policy cannot offset short-term changes in the inflation
rate which are caused by economic shocks, such as sharp oil price increases or higher administered
prices. It is thus a permanent challenge to explain any deviations in inflation from the definition of price
stability. At the same time, it is essential for the public to be confident that such shocks do not call into
question the determination and ability of the ECB to deliver price stability over the medium term.
Already the detailed public display of our monetary policy strategy as such is a very useful
communication device. Of course, real situations are always more complex than the simplified
representation that a single model or a single system of equations can offer. That is the reason why
our monetary policy concept is as comprehensive as possible, relying both on an economic analysis
and a monetary analysis, and it reserves a central role for judgement, for the collegial wisdom of the
Governing Council. Explaining thoroughly and convincingly our assessment of complex situations is
therefore of the essence.
It is this combination of full knowledge of the monetary policy concept and strategy, of precise
arithmetic definition of price stability and of detailed explanations on the assessment of the ECB every
month which permits market participants to have an intimate understanding of our policy and of the
way it is implemented. In doing so a central bank avoids two opposed inappropriate behaviours. The
first would be to give no guidance on its monetary policy and to communicate an unstructured, very
complex and partially self-contradictory representation of the economic situation; such behaviour
would not permit market participants and public opinion to be able to form pertinent expectations on
future monetary policy decisions. On the other hand, a central bank cannot in normal times
preannounce with an arithmetic precision its future monetary policy decisions. These must be derived
from the full consistency between strategy and monetary policy concept, the medium-term price
stability goal and the economic situation which is itself moving and always incorporates elements of
uncertainty, chances and risks that can materialize. What is important is that at the moment of the
decision, after having had the possibility of analysing all pertinent information and data, market
participants can correctly predict our decision thanks to their intimate knowledge of our policy.
ECB's communication in practice
Some features of the ECB are bringing about major additional challenges for external
communications. In particular, the ECB operates in a multicultural environment with 12 different
cultures and 10 different languages in the euro area and 25 cultures and 20 languages within the
scope of the European System of Central Banks. And, the ECB was given the very ambitious
challenge to be fully credible from day one, without track record and to issue a currency which would
be immediately as credible as the most credible legacy currencies.
In the practical implementation of the communication policy we make use of a wide range of
communication tools. I will mention only a few of them here:
First, the monthly press conferences after the first Governing Council meeting in each month. The
introductory statement at the press conference is a key element in our communication as it conveys
the collective view of the ECB's Governing Council on the monetary policy stance in real time. In fact,
the decision to hold a press conference after each policy meeting was unheard of among major central
banks prior to the euro. To use real time detailed communication and press conferences in this way
was a logical decision, bearing in mind (i) the attention the ECB would receive as a major player in the
world financial markets and the global economy, (ii) the necessity to "frontload" the public and the
markets with information on the thinking of the new institution and (iii) the interest as regards
communication at national level through many different languages of having timely public terms of
reference. I do not hesitate to say that this new ECB concept of real time detailed communication has
been an important element of the new paradigm in central banking communication.
Second, there is the ECB's Monthly Bulletin, which is always published one week after the press
conference. It gives a more detailed explanation of the analysis behind the monetary policy decisions.
It regularly reports on information collected by the ECB, such as the bank lending survey. Importantly,
it now also includes the ECB staff projections four times a year. An advance copy is published
immediately after the Press Conference following the Council meeting. This is another example where
the ECB has gone very far in making its policy transparent and communicating its economic
assessment in real time. The Monthly Bulletin also contains articles which provide insights into the
principles governing our policy.
Third, the members of the Governing Council members give interviews and speeches to many
different audiences. In them they explain the decisions taken and the ECB's view on current topics
within our sphere of competence. The decentralised nature of the Eurosystem is an asset especially
for communications with the general public. The Governors address in their country their national
public in their own language. They are very well placed to participate in economic debates taking place
in their home country.
Finally, the ECB publishes a large array of statistics, adding essential information on the euro area
available to financial markets and all other interested agents. There has been an ongoing process of
extending the number of statistical series released by the ECB, which I expect to continue in the
future. As a latest example, last week we have published for the first time a press release providing a
geographical breakdown of balance of payments and international investment position statistics.
Our concept of transparency
Transparency serves our main objective of maintaining price stability. As we are a unique institution
which has no precedent we have to consider very carefully the appropriate concept of transparency in
our decision-making.
We are convinced that as a collective body it is beneficial for the Governing Council to give its collegial
assessment in the form of a comprehensive and detailed statement rather than only stating the
decision and letting the interested parties wait for the detailed statement to be published later in the
form of minutes.
Our method of real-time communication on behalf of the Governing Council also goes to demonstrate
that we are collectively accountable to the public. Each of us inside the 18-member Governing Council
has to take into account the superior interests of the whole euro area. My colleagues and I are
convinced that our present real time detailed communication is, in our case which is unique, superior
to mentioning individual votes which could wrongly suggest in the eyes of some that the Governing
Council is a place where we are confronting national interests which is not the case and should never
be the case.
As the "porte parole" of the ECB and its Governing Council, I think it is remarkable that we act as a
team with high team spirit as regards the handling of a complex communication network dealing with
306 million European fellow citizens speaking their languages. The "single voice" principle in monetary
policy was introduced from the very beginning and has been efficiently applied in my judgement.
As regards non-monetary policy decisions by the Governing Council we have adopted a new
procedure in December by placing a communication on our website one day after the second meeting
of the month. Previously we communicated these decisions in various ways, for example by press
releases or by inserting information under other matters into the introductory statement. I hope that the
new procedure will contribute to easier access to non-monetary policy decisions. The document refers
to "Decisions" which means that, as a rule, it will cover those issues for which the Governing Council
has concluded its deliberations, i.e. decisions have been taken.
Has the ECB been successful in its monetary policy communication?
Having talked about the objectives of transparency and modes of external communication, I'd now like
to consider how successful the ECB has been in establishing credibility and predictability.
Evidence can be gained from financial markets and economic surveys. A key indicator of the credibility
of ECB monetary policy comes from expectations of inflation implied by the differences between the
returns on index-linked and nominal bonds and inflation-linked swap rates. When looking at these
market prices, one has to bear in mind that the spread between these nominal and real yields not only
measures market participants' inflation expectations, but also carries the inflation uncertainty risk
premium which investors require as compensation for the risk of a loss in purchasing power. Keeping
this in mind, and also looking at various measures of long-term inflation expectations in the euro area,
such as Consensus Forecast and the ECB's Survey of Professional Forecasters, one can say that
long-term inflation expectations have been pretty well anchored by the ECB's quantitative definition of
price stability from the beginning of the Euro. This is a remarkable success that observers and markets
considered quasi impossible before the euro was set up. This does not mean that there is any room
for complacency. Continued vigilance is key to preserve credibility and some increases in long-term
inflation expectations last year remind us how important it is to be permanently vigilant.
As regards the short-term predictability of monetary policy, policy moves have been pretty well
anticipated by money markets. Recent studies by academics have confirmed the predictability of the
ECB at the highest level amongst major central banks. Investors have indeed become more confident
in their forecasts of future short-term interest rate developments prior to ECB monetary policy
announcements. Bond market indicators paint essentially the same picture. Implied bond market
volatility in the euro area is currently close to its lowest level since January 1999.
Communication is an ongoing challenge
Financial markets evidence indeed indicates that we as a central bank have managed to be
understood by market professionals. But this is only part of the picture and should give no reason for
complacency. We are well aware that earning people's trust in the credibility of the ECB remains an
ongoing challenge. And we know that the familiarity of the general public with the Eurosystem and the
ECB still needs to be further enhanced.
One indication of the daunting size of our communication task was the issue of so-called perceived
inflation rising much higher than the actual measured inflation. It has turned out to be difficult to
explain people that they should not judge the general price level just by observing the prices of some
individual goods. We see the dichotomy of different target groups in the fact that there was at times a
heated debate about deflation risks among financial analysts while at the same time the general public
was deeply concerned about inflation. Fortunately, the gap between perceived and actual price
developments is narrowing down again significantly.
We are responsible for ensuring price stability for 306 million people in the euro area, who use the
euro and make economic decisions every day. So it is essential, absolutely essential, that we preserve
and enhance their trust in our single currency. They know they can rely on us to preserve their
purchasing power over time. We are an anchor of stability created by the Treaty to ensure low
inflation, in line with our definition of price stability.
Let me conclude on a more personal note.
The times when central banks were rather reclusive and closed institutions administering interest rates
with some dedication to surprise observers and markets have gone. One of the main goal of a
responsible central bank now is to have a reliable communication guiding expectations in a rapidly
changing environment. In this respect one has to fully realize that the ECB has unique challenges to
cope with.
First, when we start the press conference the Vice-President and I know that we are speaking in quasi
real time, through all of you, not only to European market participants, investors, savers, economic
agents, entrepreneurs but also to all our European fellow citizens to whom we are accountable as a
last resort. This is already a demanding and exciting task taking into account the fact that we are the
only major central bank embarking on a press conference immediately after the monetary policy
meeting.
Second, on top of that, we are fully conscious that we are speaking simultaneously to twelve different
cultures today, and many more when time comes. Making sure that a decision is exactly understood
simultaneously by a German, an Italian or a Spanish household, by an Irish, a Portuguese and a
Dutch citizen is another extraordinary challenge that no other central bank has to cope with.
Third, last but not least, we are also simultaneously speaking to the global market participants who
have themselves their own language and their own culture.
For the ECB to be credible means being credible vis-à-vis all parties concerned. Our transparent
communication must permit all parties to understand our mandate and our strategy to ensure price
stability, to anchor their medium term and long term expectations and to accurately predict our future
behaviour.
For the European and global market participants in particular I know how predictability is important. I
attach the utmost importance to our predictability which has been very good in the past, thanks to our
conceptual transparency, to our own candid explanations on our diagnosis and decisions and - last but
not least - to the quality and lucidity of yourself, members of the Frankfurt Economic Journalists, of
ECB watchers in general, of economists and of market participants. I will continue to take care that this
predictability remains as excellent as possible.