The importance of listening

24 February 2021 Blog

Governor Gabriel Makhlouf: Good communication also requires that central banks listen well.

The ECB and euro area central banks are conducting a strategy review of their monetary policy. The first such review was in 2003, and the current review is overdue. All of the 19 national central banks that are part of the Eurosystem are contributing to the review. Inevitably, much of our collective effort over the past year has been focused on responding to the pandemic but that hasn’t prevented us from working on questions of broader monetary policy strategy. And it’s important that we do so, taking a longer-term view into the effectiveness of policy and ensuring that our approach remains fit for purpose.

Central Bank communication – a two way street

An important part of the review is devoted to analysing the role of communication in monetary policy. This focus is appropriate – I spoke about it last year – since communication is now at the core of monetary policymaking. Central banks now release information to the public (in press conferences, in speeches, in their forecasts) that was previously kept hidden from view. We do this because practice, as well as theory, suggests that monetary policy can be more effective when central banks give markets and the public information about their decision-making.

However, the concept of ‘communication’ encompasses more than just making information available that was previously unavailable. Good communication also requires that central banks listen well. We can hardly work out what sorts of information it would be useful for others to know, without first listening to what those others have to say. This is particularly important in light of evidence that trust in the ECB decreased in the period after the European sovereign debt-crisis, and that this effect was larger in countries that experienced greater disruption. Given that trust in the ECB is associated with more stable inflation expectations, it is important to understand how the general public views the ECB, and where we can do more to earn its trust.

As I said last month, good engagement with people and businesses across the whole economy is a priority for me. Two weeks ago, we published a consultation paper seeking views on how we could improve our engagement.

How we are listening

The strategy review includes a wish to hear the voices of citizens across the euro area, including in Ireland. Events have been conducted by the ECB and by the 19 central banks to hear what people think about monetary policy. There has also been an ECB Listens Portal where participants were asked open-ended questions on themes including “price stability", "economic issues" and "communication".

Here in Ireland, we’ve undertaken a number of listening events. Two of these were last week, one with members of civil society and the other with members of the Irish business community. (Recordings of the events will be made available on our website in the coming weeks.) And before Christmas, we spoke to leading academics in Ireland about the issues.

Some key findings

First of all, we were happy to find that participants in last week’s events welcomed this type of forum as a positive development where they could share their views. Central banks communicate through various channels to ensure we reach as wide an audience as possible and this form of direct two way communication is a positive addition.

Of course how we communicate is key. We were told of the importance of ‘de-jargonisation’, something I am very sympathetic to. (Some aspects of our work are unavoidably complex but we do need to be clearer in how we explain the motivations behind our policies.) We also heard that our forward guidance around interest rates has given certainty to businesses and allowed them to plan ahead for the medium term (which means it is having the intended effect).

There were some common themes from last week’s participants and from respondents to the ECB Listens Portal. Respondents to the Portal emphasised the negative effects of excessive inflation, particularly when wages were not rising in line with prices. Indeed, independent central banks were created to reduce inflation rates from the very high-levels that characterised the 1970s, by offering credible commitments to maintain price stability. We have been largely successful at preventing very high overall price inflation, in line with the public’s concerns.

Something which came through in our own events was the concern that even moderate inflation can be challenging for those on lower wages who may not experience corresponding wage growth. And of course one of today’s challenges is not 1970s-style inflation but the need to explain that current inflation has been too low. Deflation is a problem because it can lead to negative spirals where consumers stop spending in anticipation of a fall in prices, which becomes self-reinforcing when demand falls too and lowers economic growth. As a result, we aim for a small positive rate of inflation (at below, but close to, 2 per cent over the medium term). However, it is true that targeting a positive rate of inflation will lead to distributional effects when nominal wages or pensions are not indexed. And of course unexpected inflation also leads to an effective transfer from savers to borrowers.

Another concern raised by respondents to the Portal and at our events was the significance of the cost of housing in their experience of inflation. This is an interesting point as housing costs are not included at present in the measure of price inflation that we target (though rents are), meaning there is a dissonance between it and the measure that consumers see as reflecting their experience. This issue is being considered in the strategic review.

The Portal also heard a fair amount of criticism of the ECB's low interest rate policy. As we anticipate that interest rates will "remain at their present or lower levels" until we have seen the inflation outlook "robustly converge" to a level sufficiently close to, but below, 2 per cent within the projection horizon (as per our forward guidance), the feedback makes it clear we need to do a better job explaining why low rates are necessary.

Finally, some wider topics also emerged in our events. Two of these were climate change (and its potential to create inflation volatility) and the interactions between fiscal and monetary policy, particularly in the context of the fiscal supports currently in place due to the pandemic. Both of these topics feature in the review.

I have only mentioned some specific aspects of feedback from our listening events. In fact a wide and varied range of issues were covered and I found them very useful.

Conclusion

A key priority for the Central Bank is to engage with the public and stakeholders across the whole economy, in particular to listen and learn. Better engagement helps us understand the issues faced by the businesses and households in the economy and the opportunities to enhance the performance of the financial system. This year, a key focus of our engagement and outreach activities will be to hear views on the impact of our monetary policy and communication and on the global challenges ahead. We’ve started but please continue to give us your views!

Gabriel Makhlouf


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