Martin Flodén: Important to communicate clearly despite constant uncertainty

After eleven years on the Executive Board of the Riksbank, Deputy Governor Martin Flodén reflects in a speech at Nordea on, among other things, the function of interest rate forecasts, the Riksbank's strategy as one of the world's most open central banks and how to clearly communicate a plan for monetary policy when conditions may constantly change.

“We are fooling ourselves if we think we can use communication about what the policy rate might look like in the distant future as a tool,” says Mr Flodén. “We mainly have one monetary policy tool to work with, which is the policy rate here and now.”

Instead, he sees communication about the future policy rate as an important complement, which can reinforce the monetary policy message and prepare economic agents for changes in the policy rate.

However, the Riksbank's forecasts for the future policy rate have often deviated from market expectations and have subsequently proved to be less accurate. There is value in not changing the policy rate itself back and forth, but it is possible, says Mr Flodén, that the Riksbank has been too reluctant to adjust its interest rate forecasts to keep monetary policy predictable.

He believes that the Riksbank's forecast for the policy rate is a good starting point for communicating uncertainties and risks using alternative scenarios. For example, the communication of sudden and unexpected turning points in the economy could be strengthened if the scenarios focus on developments that are unlikely but not unthinkable. However, he also discusses a number of problems that the Riksbank has faced in its work on the scenarios, such as the difficulty of paying as much attention to them as to the forecast.

Another trade-off between clarity and transparency can be found in the minutes of the monetary policy meetings, where members of the Executive Board sometimes enter a reservation against the majority decision. Mr Flodén thinks it is only natural that the Executive Board members do not always agree.

"Communication is clearer if the Executive Board is unanimous, because the message is then less fragmented. But I see no signs that unanimity strengthens the Riksbank's credibility. In the long run, it would probably appear strange, and hardly credible, if the Executive Board was always unanimous in its view of such difficult issues as the Riksbank faces.”

He concludes with a message for future Executive Boards.

“Carry on flying the flag of transparency and clarity! But remember that transparency and clarity do not mean that the forecasts will be accurate. There will always be some uncertainty there.”

“The challenge for monetary policy communication is to send a clear message that also captures the uncertainty.”