The weight of words matters. Nowhere is this manifested more strongly than in central banks’ monetary policy communication.

As the contours of the global economy roughen and multiple headwinds coast economies from one challenge to another, central banks find themselves on a tightrope: balancing transparent communication and pragmatic discretion. As Ben Bernanke said in a 2015 blog, “cost of sending the wrong message can be high”.

Monetary policy communication is crucial for forward guidance and inflation anchoring. As a reflection, central banks have added various communication tools, from Annual Reports to TV interviews to speeches by senior executives and more recently, increasing social media presence.

The emphasis has shifted towards making communication more visually intensive, so that it is easily comprehensible to diverse stakeholders.

Keeping with this focus on clarity in communication strategies, several research papers have extracted analytical insights from monetary policy statements. In a recent paper, using data from the publicly released minutes of Indian Monetary Policy Committee (MPC) members, during 2016 to 2022, we explore whether the sentiment conveyed by the minutes is consistent with voting pattern; in other words, do central banks ‘walk the talk’?

India offers a fitting laboratory as the RBI has consistently emphasised managing inflationary expectations and forward guidance. RBI moved to a flexible inflation-targeting approach in 2016, with a six-member MPC constituted to guide the central bank’s interest rate-setting decision.

The mandate of the MPC, comprising of equi-proportionate internal and external members, is to keep consumer price inflation (CPI) at 4 per cent, with a plus or minus 2 per cent tolerance band.

Hawkish vs Dovish

Employing advanced analytical tools, the analysis suggests:

First, sentiments and voting patterns may not always be in congruence.

More specifically, hawkish sentiment does not always get reflected in a rate hike, while dovish sentiments are more likely to translate into a rate cut.

Second, MPC members use a lot of neutral words, which adds to the noise in the communication.

This is a crucial insight, not evidenced thus far in the global context.

Third, there exists significant divergence in the outlook and relatedly, in sentiments for internal versus external members: the former are typically more hawkish, whereas the latter are generally dovish and more attuned towards growth. Although sentiments differ voting patterns tend to converge. Some of these concerns are reflected in popular press, which has been critical of the central bank’s monetary policy strategy.

From a policy standpoint, this suggests three Cs for central banks to finetune their monetary policy communication:

Consistency: Inflation anchoring during hawkish phases may be hampered by incongruence between sentiment and voting patterns.

Clarity: Choice of words matter and neutral words might add to the noise rather than giving clear signals.

Conscious of groupthink: Central banks need to be aware of groupthink and how it can influence policy decisions.

Given the increasing global uncertainties and stubborn surge in inflation worldwide during the last few years, the growth-inflation policy calculus has become increasingly complicated.

Clear and consistent communication from central banks in this scenario is crucial if the market participants are to correctly decipher the intended ‘forward guidance’ of MPC, across varying policy cycles.

Roy Trivedi is Associate Professor at National Institute of Bank Management, Pune, India; Ghosh is Advisor (Executive Office), Qatar Central Bank, Doha, Qatar. Views expressed are personal