Why does implementing a high-quality communication policy make sense for the National Bank of the Republic of Kazakhstan?

Competent implementation of a communication policy by a central bank is a really important issue in the conditions of inflation targeting with a freely floating exchange rate. In turn, such policy implies compliance with the principle of transparency when a central bank performs its functions. 

In other words, the implementation of the communication policy means timely provision of information about a central bank’s activities and its delivery to the target audience. Communication policy aims to manage inflation expectations of the population and contain them within the target inflation corridor. Anchoring inflation expectations increases the effectiveness of monetary policy.

Since the transition to the inflation targeting regime in Kazakhstan, National Bank (NB RK) began to work on transparency. Nowadays this institute provides information about its ultimate goals, planned strategy, assessments, and also provides economic agents with explanations about the decision-making mechanism. All this suggests that the conditions for accountability and transparency of NB RK are being met.

However, even in relatively stable periods the perceived inflation of Kazakhstan consumers, i.e., the inflation that economic agents take as a basis when planning a behavioral strategy, was higher than the actual level of inflation. This indirectly speaks of the population’s distrust of the NB RK’s policies.

Against the backdrop of increased geopolitical pressure and unprecedented uncertainty, inflation expectations have increased even more and reached historical highs. The report on the monetary policy of NB RK (February, 2023) provides information that the median estimate of expected inflation increased from 16.5% in July to 21.3% in December 2022. In this regard, the question arises: how effective is the communication policy of the NB RK at the moment? And the second question is: which elements of this policy require modernization?

The first thing to do is to look at the relationship between inflation expectations and its actual level. High inflation expectations are one of the internal factors of inflation. The higher inflation expectations are, the lower are the degree of public confidence in the country’s central bank and the policies it pursues. In Kazakhstan, it firstly results in a dramatic rise in consumer demand. Consumers, expecting an increase in prices for goods in the future, especially durable goods, create so-called excess demand inflation, when purchases are made in large quantities at “old” prices, which, in turn, results in an increase in prices for these goods already at the moment "now".

The importance of stable inflation expectations within the target inflation corridor is emphasized in the study written by the World Bank. This organization also concludes that in emerging economies (which includes Kazakhstan), inflation expectations are more sensitive to monetary shocks, which are the difference between the actual inflation rate in the current period and the expected inflation rate in the past period. In addition, many economists, when analyzing various external influences on inflation in countries or when assessing the effectiveness of monetary policy, note the importance of stable inflation expectations of the population, at least in the long term. In particular, this can be seen in the article (Lena Drager, Klaus Grundler, Niklas Potrafke; 2022) of the scientific journal SSRN or in the work of the Russian economist N.A. Ranneva. (2019) Thus, it is impossible to stress enough the importance of anchoring inflation expectations to prevent actual inflation from rising.

The more transparent the central bank conducts its activities, the better the population will understand its goals and the measures it takes to achieve these goals. Transparency of the central bank's activities is the basis for competent implementation of communication policy. But the question arises: to what extent should the central bank increase transparency in order to ensure public confidence in the conducted policy?

An article by German researchers (Lena Drager, Michael Lamla, Damian Pfeifar; 2022) provides the result of an analysis of the impact of various types of communication policies on consumers. In particular, economists have tried to identify the most appropriate type of communication about current changes in inflation so that it does not have a negative effect on inflation expectations. The article shows that targeted communication using explicit numerical inflation forecasts can significantly limit the observed spillover effects from the current inflation surge to inflation expectations. The authors also found some evidence that textual communication characterizing a spike in inflation as temporary or longer lasting than previously thought can reduce spillovers from current inflation to long-term inflation expectations, but to a lesser extent compared with the alternative of numerical inflation forecasts. In other words, numerical forecasts of future inflation are often better at anchoring expectations than text messages about the nature of inflation (temporary/persistent).

But in addition to the forecasts, it is interesting to analyze the effectiveness of the “new” communication strategy of the central bank. Thus, there are widespread studies around the world about such communication strategies as conventional forward guidance, which is the publication of future trajectories of interest rates, while the central bank undertakes to maintain them within a given corridor. For example, the article (Eric R. Sims, Jing Cynthia Wu; 2019) examines the impact of non-traditional monetary policy instruments, which include the publication of future interest rates. It is important that the authors note that this policy can be used by central banks that have a high level of confidence in its actions, otherwise it will be ineffective.

The work (Alexander Isakov, Petr Grishin, Oleg Gorlinsky; 2018) is also devoted to this topic. In this article authors consider the introduction of a policy of conventional forward guidance using the example of various countries around the world. But they come to the opposite conclusion: the publication of the future interest rate increases the efficiency of monetary policy by increasing its transparency and predictability. Also it improves the functioning of markets due to increased ability to understand and analyze the statistics provided by the central bank. However, the work still notes risks associated with a decrease in the efficiency of the base rate, with excessive smoothness of its trajectory when forecasting, which must be taken into account when introducing a policy of conventional forward guidance.

Another study (Olivier Coibion, Yuri Gorodnichenko, Michael Weber; 2021) examines various types of communications of central banks, including the conventional forward guidance policy which has been already mentioned. However, the authors note that these communication measures are largely aimed at financial markets rather than at the general population. As a result, communication policy works only for a narrowly targeted sector of consumers and does not reach its maximum effectiveness. The authors put forward direct communication between the central bank and the public as more effective tools of communication policy. However, the authors show that ordinary consumers are more likely to miss most information content when it is presented to them in the form of a news article. In our opinion, this effect is observed, in particular, because the majority of the population has low financial literacy. So, news about an increase/decrease in interest rates or any other measures of the central bank is not informative for them. The study's authors conclude that if central banks want to add direct communication to the public as a new policy tool, they will have to find new ways to reach the public without relying on traditional media.

The issue of communication with the public was also addressed in the review (Donato Masciandaro, Oana Peia, Davide Romelli; 2022). It notes that at the moment, due to the widespread use of non-traditional monetary policy instruments, the target audience of central banks is not only participants in financial markets, but also the ordinary population. In recent years, there has been pressure to better explain what central banks do, prompting them to step up their efforts to communicate to a wider audience. However, communicating with non-specialists presents a number of challenges, starting with the fact that the audience is much more segmented and less likely to engage with monetary policy’s announcements. The reason is that they simply do not understand the message. As such, central banks are increasingly using social media as a regular element of their communications policies. The review offers recommendations for getting started with social media content analysis. Such analysis will help policymakers understand the effectiveness of communication in influencing public beliefs. It can also provide a useful tool for understanding how communication can be more precisely targeted to reinforce expectations.

NB RK must pay special attention to ensuring that the information it provides is understandable to the public. Otherwise, any actions of NB RK will be meaningless: economic agents will act in the markets based only on their own beliefs, while conducted monetary policy will not bring the expected result. In the context of the unprecedented uncertainty of the modern global economy that Kazakhstan is now facing, the range of capabilities of NB RK is somewhat limited. Therefore, high-quality communication with the public is one of the main factors in achieving results in ensuring price stability in the country.

At the moment, NB RK uses almost all available tools of communication policy, but its implementation does not bring significant results. This may indicate that this policy is carried out more in quantitative rather than qualitative terms. The majority of the population does not have the knowledge of how to use the information provided by NB RK. This often serves as the basis for misinterpretation of statistical data of NB RK, discrediting the actions of the monetary authority, etc. Thus, the communication policy of NB RK requires, first of all, the modernization of the public relations process.