2  Providing forecasts based on both a constant interest rate and market expectations give information not only about the sign but may also give some guidance about the range. See, for example, the following citation from the Bank of England’s Inflation Report of February 2008: “Under market interest rates, the central projection for inflation was a little above the target in the medium term, while under constant interest rates, it was below the target.” This suggests that the likely interest rate path lies somewhere between a constant rate and market expectations. BIS Review 132/2008  1  Publishing endogenous interest rate paths raises a number of issues, and there is disagreement among both academics and central bankers on whether being that precise about future policy intentions is beneficial or not. The key issue in the debate is whether such communication implies guidance or noise. Some of the arguments for transparency relate to the beneficial effects when private agents understand the central bank’s reaction function, such that market interest rates will adjust more appropriately to economic news. Publishing the interest rate forecast may not be sufficient to communicate the central bank’s reaction function, as one specific forecast does not in itself convey much information about how the central bank responds to various shocks. One could argue that three ingredients are required; 1) the forecasts, 2) how the central bank responds to shocks, and 3) the criteria underlying the forecasts and reaction function.

Finally, I will briefly touch upon another important aspect of monetary policy, namely how to make good collective decisions, and the role of the staff in the monetary policy decision process. Communicating future monetary policy intentions Most central banks communicate future policy intentions in one way or another. The majority of central banks communicate indirectly through forecasts based on technical interest rate assumptions, and by giving verbal signals about future interest rate decisions in policy statements and speeches. With such indirect communication, the market participants gain information about the sign of future interest rate decisions, but may have less information about the size. Until November 2005, Norges Bank used technical interest rate assumptions in the inflation forecasts, but also on some occasions commented on whether the Bank intended to follow a different policy than what seemed to be reflected in market interest rates. Thus, the Bank gave signals about the sign of future policy intentions relative to market expectations, but not on the size. 2 From November 2005, Norges Bank started to use endogenous interest rate forecasts in the Monetary Policy Report. Norges Bank was the second central bank with endogenous interest rate assumptions, following the Reserve Bank of New Zealand, who introduced it in 1997. More recently, the Swedish Riksbank and the Czech National Bank have also started to publish interest rate forecasts. 1  Woodford, M. (2005), “Central-Bank Communication and Policy Effectiveness,” paper presented at FRB Kansas City Symposium on “The Greenspan Era: Lessons for the Future,” Jackson Hole, Wyoming, August 25-27, 2005.