The Announcement of Monetary Policy Intentions

The Information Content of Central Bank Interest Rate Projections: Evidence from New Zealand*

“…For those central banks, announcing the forward interest rate tracks may neither improve the predictability of monetary policy nor the anchoring of longterm inflation expectations. Moessner and Nelson (2008) and Ferrero and Secchi (2009) examine the behavior of futures rates at the announcement days of the RBNZ's interest rate projections before the outbreak of the financial crisis. Karagedikli and Siklos (2008) investigate the effects of monetary policy surprises on the New Zealand dollar exchange rate in a similar setup.…”

How Effective Is Central Bank Forward Guidance?

“…There has been a large number of event-study investigations of the effectiveness of FG (e.g., Andersson and Hofmann, 2010;Moessner and Nelson, 2008;Ferrero and Secchi, 2007;Mirkov and Natvik, 2013;Drew and Karagedikli, 2008;Karagedikli and Siklos, 2008;and Moessner, 2013), which have yielded mixed results. For example, Andersson and Hofmann (2010) found "some mild support for the notion that the publication of an interest rate path forecast may enhance the central bank's leverage over medium term (5-year) interest rates."…”

“…Using a similar methodology, Moessner and Nelson (2008) found that FG announcements had a relatively small effect on expectations of future rates and no evidence that policy rate changes that deviate from prior FG announcements unsettle the markets. Ferrero and Secchi (2007) found small responses of 3-and 12-month-ahead 3-month futures rates; however, they found that "the change in market interest rates in the period between two publications of the interest rate path is similar to the revision of the published path" (p. 3). They interpret this finding as evidence that "market operators have well understood the conditionality of the central bank's projections" (Ferrero and Secchi, 2007, p. 30).…”

How Effective Is Central Bank Forward Guidance?

“…They conclude that the effect of surprises in monetary policy announcements on expectations of future rates is relatively small and that there is no evidence that deviations from prior forward guidance unsettle the markets. Ferrero and Secchi (2007) analyze the variability of market interest rates around policy decision dates under forward guidance for the United States, the euro area, Norway, and New…”

“…However, the improvement in forecasting performance began about a year in advance of the adoption of forward guidance: The average difference for the year before forward guidance was -55 basis points. This may be taken as evidence supporting the usefulness of forward guidance because the period roughly coincides with a change in the communications strategy of NB, focusing more directly on interest rate conditions, including information of a quantitative range for the likely level of the short-term interest rate on a 3-to 4-month horizon (see Ferrero and Secchi, 2007).…”