(2nd Debate) Julian Callow

How should central banks signal their
intentions regarding future interest
rates?
2nd Debate, "The ECB and Its Watchers IX"
Frankfurt am Main, Friday September 7th, 2007
Julian Callow
Managing Director, Chief European Economist
Barclays Capital
Julian.Callow@barcap.com
Confidence Bands – Riksbank projections
Riksbank inflation projections from a
year ago
6
5
4
3
2
1
0
-1
-2
Riksbank CPI inflation projections
(Oct-06), % y/ y
Uncertainty bands show
the Riksbank's 50%, 75%,
1
and 90% confidence 0
02 03 04 05 06 07 08 09
Riksbank's latest interest rate
projections
7
6
5
4
3
2
Riksbank repo rate projections
(Jun-07), %
02 03 04 05 06 07 08 09 10
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
2

Central banks’ interest rate projections
10
9
8
7
6
5
4
Reserve Bank of New
Zealand
95 98 01 04 07 10
8
7
6
5
4
3
2
1
0
Norges Bank Sveriges Riksbank
95 98 01 04 07 10
Source: Bank of Canada, Norges Bank, Riksbank, Barclays Capital.
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
04 05 06 07 08 09 10
Barclays Capital Investor Survey of Central Bank
Communication (2007)
North
America: 219
Survey conducted: 1 -24 August, 2007; 1183 respondents
Geographical breakdown
Rest of World:
96
UK: 248
Asia ex Japan:
65
Japan: 93
Europe
ex UK:
462
Academic: 5
Non-financial
firm: 80
Central bank:
47
Hedge fund:
109
Institutional representation
Press/ media:
53
Other: 110
For further information on the survey methodology and results, please contact:
Lauren Ungerleider (Lauren.Ungerleider@barcap.com)
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
3
Asset
management:
380
Commercial
bank: 399
4

Personal understanding of central banks'
objectives
Question 1 - How confident are you in your understanding of the following
central banks' objectives (ie, concerning variables such as inflation,
employment, asset prices, money growth, exchange rates, etc.)?
Fed
ECB
BoE
BoJ
Very confident Confident Fairly confident Not confident Confused
3%
22%
25%
21%
16%
40%
47%
44%
31%
27%
24%
37% 35% 8%
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
Personal understanding of CBs' predictability
3% 1%
6%
1%
7% 1%
Question 2 - How confident are you in your understanding of these CBs’
"reaction functions" (ie., how each CB would respond to changes in the
outlook for inflation, activity & other variables, eg. asset prices, given
their objectives)?
Fed
ECB
BoE
BoJ
Very confident Confident Fairly confident Not confident Confused
2%
16%
15%
10%
13%
43%
47%
45%
35%
35% 41%
29%
30%
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
10%
10%
6%
9%
1%
1%
2%
5
6

Markets’ understanding
Question 3 - Based on your perceptions of those you work with, how well do
you feel the financial markets understand the central banks' objectives
and "reaction functions"?
Fed
ECB
BoE
BoJ
Very well Well Fairly well Not well Not at all well
2%
14%
13%
11%
17%
38%
43%
43%
41%
38%
33%
34%
32%
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
Economic agents’ understanding
9%
8%
11%
Question 4 - In your view, how well do the 'economic agents' (ie, price &
wage setters) within each country/region broadly understand the
objectives & reaction functions of the CB responsible there for monetary
policy?
Fed
ECB
BoE
BoJ
Very confident Confident Fairly confident Not confident Confused
8%
6%
7%
1%
17%
31%
33%
31%
38%
39%
40%
42%
36%
21%
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
8%
16%
17%
1%
1%
2%
2%
3%
2%
8%
7
8

Communication of envisaged future policy action
(1)
Question 5 - Do you think central banks should communicate to financial
markets the course of monetary policy action they envisage announcing
at their subsequent policy meeting?
Full results Asia ex Japan Europe ex UK Japan UK North America
60%
50%
40%
30%
20%
10%
0%
Yes - at all times Yes - as a general
rule
Yes - but only
occasionally
No - not necessary
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
Communication of envisaged future policy action
(2)
Question 5 - Do you think CBs should communicate to financial markets the
course of monetary policy action they envisage announcing at their
subsequent policy meeting?
50%
40%
30%
20%
10%
0%
Full Results Results during 1 - 12 August Results during 13 - 24 August
Yes - at all times
unless prior
communication is
impossible
Yes - as a general
rule
Yes - but only
occasionally
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
No - not necessary
9
10

Communication of envisaged future policy action
(3)
Question 5 - Do you think central banks should communicate to financial
markets the course of monetary policy action they envisage announcing
at their subsequent policy meeting?
Yes - at all times
Yes - as a general rule
Yes - but only occasionally
No - not necessary
Wish-list (1)
Asset
mgnt
15%
41%
18%
27%
Commercia
l bank
17%
51%
16%
17%
Hedge
fund
7%
41%
18%
34%
Central
bank
24%
38%
20%
18%
Nonfinancial
firm
12%
54%
17%
17%
Academi
c
25%
50%
0%
25%
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
Question 6 - In your opinion, how important is it for CBs to publish the
following?
Essential Important Useful Not important Distracting
Statement post policy change
Policy analysis reports
Minutes of policy meeting
Summary projections
Statement post policy inaction
Press conference with Q+A
Detailed info. on projections
Votes of policy makers
Transcript
WPs/ Thematic research
Other
19%
48%
17%
16%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
11
12

Wish-list (2)
Question 6 - In your opinion, how important is it for CBs to publish the
following?
Scale 1~5, where 1 = distracting; 2 = not important; 3 = useful; 4 = important; 5 = essential
Average mark
Statement post policy change
Statement post policy inaction
Minutes of policy meeting
Policy analysis reports
Summary projections
Press conference with Q+A
Votes of policy makers
Detailed info. on projections
Transcript
WPs/Thematic research
Wish-list (3)
Asia ex
Japan
4.7
4.3
4.2
3.9
4.0
3.7
3.8
3.8
3.6
3.2
Europe
ex UK
4.7
4.1
3.9
4.1
4.0
3.7
3.4
3.5
3.2
3.3
Japan
4.8
4.1
4.4
4.2
3.9
3.9
3.8
3.5
3.5
3.4
4.7
3.8
4.2
4.3
4.0
3.5
3.6
3.6
3.1
3.3
North
America
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
Question 6 - In your opinion, how important is it for CBs to publish the
following?
Average mark*
Statement post policy change
Statement post policy inaction
Minutes of policy meeting
Policy analysis reports
Summary projections
Press conference with Q+A
Votes of policy makers
Detailed info. on projections
Transcript
WPs/Thematic research
Asse
t
mgnt
4.7
4.1
4.1
4.1
4.0
3.5
3.4
3.5
3.3
3.4
Commercia
l bank
4.7
4.1
4.2
4.0
4.1
3.7
3.5
3.7
3.4
3.2
Hedg
e
fund
4.5
3.9
4.1
4.2
4.0
3.3
3.5
3.7
3.4
3.4
Central
bank
*Scale 1 to 5, where 1 = distracting; 2 = not important; 3 = useful; 4 = important; 5 = essential
4.8
4.4
4.1
4.3
4.1
3.9
3.5
3.7
3.0
3.7
4.1
3.7
3.5
3.7
3.2
3.2
UK
Nonfinancia
l firm
4.6
4.1
3.9
4.2
4.6
4.2
4.2
4.1
4.2
3.3
3.6
3.8
3.6
3.4
Academi
c
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
4.6
4.4
3.6
4.6
4.2
3.2
3.4
3.0
2.6
3.0
Rest
of
World
4.8
4.3
4.2
4.3
4.3
3.7
3.4
3.9
3.4
3.5
Othe
r
4.7
4.1
4.0
4.2
4.2
3.7
3.5
3.8
3.3
3.3
13
14

Overall assessment of central banks’
communication
Question 7 - Please give a mark which conveys your overall sense of how
well the following central banks communicate with the markets and
broader economic agents (1 = lowest, 10 = highest communication
abilities)
Full Results Results during 1 - 12 August Results during 13 - 24 August
7.4 7.5 7.3 7.2 7.3 7.1 6.9 6.9 6.8
Fed ECB BoE BoJ
5.1
4.9
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
Overall assessment of central banks’ communication
(2)
Question 7 - Please give a mark which conveys your overall sense of how
well the following central banks communicate with the markets and
broader economic agents (1 = lowest, 10 = highest communication
abilities)
Average
Fed
ECB
BoE
BoJ
Average
Fed
ECB
BoE
BoJ
Asset
mgnt
7.3
7.3
7.0
5.0
Asia ex
Japan
7.7
7.4
6.8
5.5
Commercial
bank
7.5
7.2
6.8
5.2
Europe ex
UK
7.5
7.4
6.8
5.1
Hedge
fund
7.1
7.0
6.8
4.2
Japan
7.3
6.9
6.9
4.7
Central
bank
7.9
7.9
7.3
6.1
UK
7.1
6.9
6.9
4.8
Nonfinancial
firm
7.3
6.8
6.9
5.2
North
America
7.2
7.0
7.0
5.1
Academic
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
6.8
5.2
8.2
3.8
5.2
Rest of
World
7.7
7.4
7.1
5.6
Other
7.5
7.1
6.9
5.4
15
16

Investor perceptions of CB inflation commitment
(1)
Question 8 - Some members of the FRS have said they believe the inflation
rate for the US "core" PCE deflator should reside in a "comfort zone" of
1-2%. How determined do you think the Fed is to realise this during the
next five years?
Highly determined Reasonably determined
80%
70%
60%
50%
40%
30%
20%
10%
0%
Not very determined Not at all determined
Asia ex Japan Europe ex
UK
Japan UK North
America
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
Rest of
World
Investor perceptions of CB inflation commitment
(2)
Question 9 - The ECB/Eurosystem has said that its definition of price
stability is "below, but close to, 2%", with reference to the HICP. How
determined do you think the ECB/Eurosystem is to realise this during the
next five years?
Highly determined Reasonably determined
70%
60%
50%
40%
30%
20%
10%
0%
Not very determined Not at all determined
Asia ex Japan Europe ex
UK
Japan UK North
America
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
Rest of
World
17
18

Investor perceptions of CB inflation commitment
(3)
Market perception on Fed determination to
realise annual inflation rate for US core PCE
deflator of 1-2pc during next 5yrs
70%
60%
50%
40%
30%
20%
10%
0%
19%
64%
17%
1%
Highly Reasonably Not very Not at all
determined determined determined determined
Disclaimer
Market perception on ECB determination to
realise price stability below/close to 2%
with reference to HICP during next 5yrs
70%
60%
50%
40%
30%
20%
10%
0%
40%
50%
9%
1%
Highly Reasonably Not very Not at all
determined determined determined determined
Note: this shows mean values and excludes responses for “no comment” and “no view”
Source: Barclays Capital Investor Survey of Central Bank Communication (August 2007)
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