A Forward Guidance Indicator for the South African Reserve Bank: Implementing a Text Analysis Algorithm

Abstract

The growing prevalence of forward guidance, in addition to central banks' efforts to improve and structure its use, has spawned growing interest among market participants and academics. Several scholars have endeavoured to develop quantitative tools to measure, or express on a nu merical scale, qualitative forward guidance of central banks. In the context of South Africa, such studies are extremely scant. The expansion of central bank communications and technological advances has given rise to an area of research that analyses the words and phrases used by central banks, using semantic-modelling and other text-mining techniques. Using these techniques, we construct a novel forward guidance indicator (FGI) for the South African Reserve Bank (SARB). Specifically, we apply text-mining and text-analysis techniques to monetary policy committee (MPC) statements to generate an index measuring the stance of monetary policy. Using a series of applications, we establish that our FGis represent a useful tool to explain and predict future changes in the repo rate. Furthermore, our results indicate that our FGis are primarily driven by inflation expectations.