GOOD TRANSPARENCY PRACTICES FOR MONETARY POLICY BY CENTRAL BANKS

I.  Clarity of Roles, Responsibilities and Objectives of Central Banks for Monetary Policy

Explanation and rationale

An ultimate objective of monetary policy is an important long-term goal that can be achieved using monetary policy, such as price stability or noninflationary growth. Central banks may have more than one ultimate objective. The institutional framework of monetary policy refers to the basic conceptual structure governing the institutions involved in the preparation and implementation of monetary policy, as well as the relationship between those institutions.

A clear statement of the ultimate objectives and institutional framework of monetary policy identifies the mandate of the central bank. Specifying these key elements in authorizing legislation (e.g., a central bank law) or a regulation (a rule or order that details the practices and procedures followed by a unit of government such as a central bank) gives them particular prominence. Doing so also avoids ad hoc and frequent changes to the fundamental priorities of a central bank. Giving monetary policy objectives a clear and firm legal basis also facilitates transparency by allowing outcomes to be compared with goals. Similarly, by defining the institutional framework in legislation or regulation, the parties responsible for achieving the objectives can be held accountable.

There are distinct advantages to establishing the objectives and institutional framework of the central bank in a separate law. Central bank law ranks high in the hierarchy of legal texts, since the central bank is one of the fundamental economic and financial policymaking institutions of an economy. A central bank law provides a common reference point that summarizes and catalogs the various duties and responsibilities of the central bank in a single document. This can enhance transparency by providing more clarity and accessibility for the public than in the case where the central bank’s fundamental roles and functions are defined in numerous laws, and hence are more difficult to find and interpret.

Explanation and rationale

Specifying objectives in legislation makes the ultimate goals of monetary policy part of the framework and body of laws governing the country. The public disclosure of the objectives of monetary policy makes information readily available and accessible to all interested parties. Explaining the ultimate objectives involves giving detailed information in a format or style that is readily understood by a wide audience.

Central banks may have qualitative objectives, which refer to broad goals of an unspecified nature, or quantitative objectives, which refer to specific numerical targets for a variable that the central bank can achieve or influence. An example of a qualitative goal may be price stability or financial stability, whereas a quantitative objective may be a rate of change for a particular price index over a specified period.

Disclosing the ultimate objectives in publications and public statements and explaining them to the public raises the awareness and understanding of the monetary policymaking process. Disclosure also helps the public to form more accurate expectations about monetary policy operations, and to assess the performance of the institution in achieving its objectives.

Application

The ultimate objectives of nearly all central bank respondents are listed in the central bank law. Many countries list several broad objectives in the central bank legislation (such as stability of the currency or prices, or financial stability) without prioritizing them, while in recent years some countries list price stability as the primary objective.¹ Most countries disclose the objectives of the central bank in their annual reports, with most of them providing explanations in periodic reports, official publications, and public appearances of central bank officials. Some central banks issue a mission statement (e.g., the Eastern Caribbean Central Bank, the Hong Kong Monetary Authority, the Central Bank of Swaziland, and the National Reserve Bank of Tonga, which is highlighted in the annual report of these banks) to provide the public with a better understanding of their objectives.

For the Eurosystem,² the treaty establishing the European Community and the Statute of the European System of Central Banks (ESCB) and the European Central Bank (ECB) states that the primary objective of the ESCB is to maintain price stability.³ The objective is also explained through the Monthly Bulletin, the Annual Report and the public releases to the media.

The objectives of the Bank of Japan, as specified in the Bank of Japan Law, are to “issue banknotes and to carry out currency and monetary control.... [and] ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of an orderly financial system.” The Bank of Japan Law also stipulates that “Currency and monetary control shall be aimed at, through the pursuit of price stability, contributing to the sound development of the economy.”⁴ Officials of the Bank of Japan make public appearances and speeches to clarify and explain the objectives. The objectives are also disseminated through a range of publications, many available on the website.

The objective of the Bank of Mexico, as specified in legislation, is “to provide the country’s economy with domestic currency. In pursuing this purpose, the primary objective shall be to seek the stability of the purchasing power of said currency.” ⁵ The Bank of Mexico discloses and explains its objectives through an annual Monetary Policy Statement, which elaborates on the main objectives of the monetary program in more specific quantitative terms. The Bank of Mexico also discloses its objectives to the public through written reports submitted to the legislature and through its publications.

The objective of the Reserve Bank of New Zealand, as specified in Article 8 of the Reserve Bank of New Zealand Act,⁶ is “to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.” The Reserve Bank discloses and explains its objective through various publications including fact sheets, booklets, the Annual Report, news releases, articles in the monthly bulletin, publicly disclosed “Policy Targets Agreements” between the Governor of the Reserve Bank and the Treasurer, and documents available on its website⁷, as well as statements and public appearances by officials.

Implementation considerations

Defining objectives in legislation involves some tradeoff between permanence and flexibility. Since laws may be difficult to change at short notice, and the objectives of central banks may evolve over time, it may be prudent to allow the central bank some flexibility to deal with different circumstances. Changing the legislation too frequently can be counterproductive if the public’s understanding of the monetary policymaking process is in a state of flux. On the other hand, periodic amendment of the legislation called for due to changes in the economic environment, and the process of altering the governing laws can promote transparency through a public discussion on the merits of the issue. Defining the objectives of monetary policy in a treaty (e.g., the European System of Central Banks) or in a constitution (e.g., Brazil) makes it more difficult to change the objectives, because of the greater degree of consensus required to amend these forms of legislation.

Some laws specify multiple objectives for the central bank. As the analytical and operating framework of the central bank evolves, the emphasis that a central bank places on the different objectives may change. In the presence of such multiple objectives, it is important for the central bank to disclose and explain each objective, so the public is aware of any potential tradeoffs between them. Transparency can be enhanced if the relative priorities of the different objectives are clarified.

Explanation and rationale

The responsibilities of the central bank are the specific duties and functions it may be required to perform and for which it can be held accountable. For example, a central bank may be responsible for issuing currency or managing foreign exchange reserves, in addition to its role of conducting monetary policy. The responsibilities of the central bank include the general duties it performs as part of the overall financial system. For instance, central banks are often assigned responsibility for providing a stable financial system by supervising and regulating the banks or overseeing the payment system.

Specifying the responsibilities of the central bank in legislation provides the public with an understanding of the mandate of the central bank and the scope of its operations, as well as how it relates to the rest of the monetary and financial system. A clear understanding of the role and responsibilities of the central bank is necessary for the public to be able to assess its performance, understand the limits of its powers, and hold it accountable.

Application

The responsibilities of central banks are usually specified in the legislation that establishes the central bank, although they may also be spelled-out in other laws. The responsibilities established in central bank laws are typically quite broad, and may include functions and activities that the central bank does not fulfill on a regular basis.

Nearly all central bank respondents indicate that their responsibilities are specified in the central bank law, while a significant majority of respondents publicly disclose their responsibilities in their annual reports, and a majority of respondents disclose their responsibilities in written reports submitted to the legislature.

Implementation considerations

There may be circumstances where central banks are required to assume new responsibilities outside the scope of their regular activities or beyond their mandate as specified in the central bank law. Under these circumstances, the central bank law can be amended to include the new responsibility, or separate legislation can be passed. (Also see Implementation considerations for 1.1.1). Alternatively, if the new responsibility is only temporary, does not conflict with existing laws, and does not interfere with the primary mission of the central bank, there may be no need to specify the new responsibility in legislation. Under these circumstances, however, the central bank should note the assumption of new responsibility, and the reasons for doing so, in its public reporting and publications.

Explanation and rationale

Monetary policy instruments are the various tools that the central bank can use to influence liquidity conditions and pursue its monetary objectives. The legislation establishing the central bank (usually the central bank law) gives the central bank the authority to utilize policy instruments if it specifies the broad range of applicable instruments and makes it clear that the central bank has the power to use them.

Providing the central bank with a legislative mandate to use monetary instruments gives it the necessary jurisdiction over monetary policy and ensures that there are clear lines of responsibility for the implementation of policy. Transparency is enhanced because it is clear who has control over policy instruments, and who bears the ultimate responsibility for the implementation of policy.

Application

Almost all central banks have the authority to use monetary instruments established in their governing legislation. A significant majority of central banks disclose this authority in their annual reports, while many central banks disclose their authority to the public through an official bulletin, reports to the legislature, publication in the government gazette, or public release on their website.

The Bank of Japan Law ⁸ states that “the Bank of Japan’s autonomy regarding currency and monetary control shall be respected.” The Law specifies a wide range of operations that the Bank can conduct in order to achieve its objectives, including buying and selling bonds and bills, making loans, and accepting deposits. The Law assigns responsibility for decisions on monetary policy, including the guidelines and the framework for market operations to the Policy Board.

The Bank of Korea Act details the various monetary instruments that the Bank can use to implement monetary and credit policies.

Implementation considerations

Specifying the monetary policy instruments in legislation can cause difficulties for the central bank if they are defined too narrowly or rigidly. As financial systems evolve, central banks may rely on different instruments than those in use at the time the central bank law was drafted and adopted. If the authorizing legislation defines the available instruments narrowly, the central bank may be prevented from using a more effective instrument at some later date. To provide the central bank with flexibility in using policy instruments, the legislation should be broad enough to encompass the potential range of instruments that the central bank might use.

Explanation and rationale

Disclosure of institutional responsibility for foreign exchange policy involves publicly identifying which institution is in charge of setting policy for the exchange rate. The policy decisions include the choice of the exchange rate regime (e.g., fixed, floating, or pegged), specific targets (if any) for the exchange rate, and decisions on the operations of the chosen exchange rate regime (e.g., intervention).

The exchange rate is a highly visible and important price signal for an economy with important implications for the conduct and effectiveness of monetary policy. Because of the interrelationship between monetary and exchange rate policies, it is important to identify clearly which institution is responsible for foreign exchange policy, so that markets and the public can appreciate how decisions are made and who is accountable for those decisions.

Application

Institutional responsibility for foreign exchange policy is specified in the central bank law for nearly all central bank respondents. A significant majority of respondents disclose responsibility for foreign exchange policy in their annual report, while many central banks disclose their responsibility through written reports to the legislature, publication in an official bulletin, or publication in an official government journal or gazette.

The Czech National Bank Act¹⁰ states that the Bank has the power to proclaim the exchange rate of the currency vis-à-vis foreign currencies and manage gold and foreign exchange reserves.

For the Eurosystem, the EC Treaty and the Statute of the ESCB assign the Eurosystem the basic task of conducting foreign exchange operations, consistent with the provisions of Article 111.¹¹ Article 111.1 of the Treaty stipulates that the Council of Ministers, acting unanimously on a recommendation from the ECB or from the European Commission, and after consulting the ECB in an endeavor to reach a consensus consistent with the objective of price stability, and after consulting the European Parliament, may conclude formal agreements on an exchange rate system for the euro in relation to non-Community currencies.

The Bank of Korea Act¹² states that the Bank of Korea shall “exercise an advisory function concerning the Government’s policies on exchange rates, the foreign currency loans and deposits of banking institutions, and the setting of foreign exchange overbought and oversold position limits on them.”

The Bank of Uganda is empowered by statute to prescribe the framework for determining the external value of the Uganda shilling, in consultation with the Minister of Finance. The Bank’s stated exchange rate policy is announced as part of the annual monetary program in the budget speech.

In the United States, exchange rate policy is established by the Secretary of the Treasury within the framework of the Federal Reserve Act, the Gold Reserve Act of 1934, and the Bretton Woods Agreements Act, with the Federal Reserve being an active participant in formulating and implementing that policy. These arrangements are discussed in the Federal Reserve Publication Purposes and Functions and the quarterly reports on Treasury and Federal Reserve Foreign Exchange Operations, submitted to the Congress, as well as the Federal Reserve Bulletin and Annual Report.¹³

Implementation considerations

Some central banks do not have formal authority for foreign exchange policy (such as a legislative mandate), but carry out this responsibility by tradition (e.g., South Africa). Under these circumstances, public disclosure of institutional responsibility may be complicated by the informal nature of the authority. However, where the central bank carries out this responsibility by tradition, the central bank should find occasion in its public reporting and publications to disclose this role.

Explanation and rationale

Modalities of accountability refer to the means, methods, and procedures used by a central bank to account for its actions and report on its activities. Specifying the modalities in legislation means that the central bank is required by law to provide information to the public on its monetary policy activities and other responsibilities.¹⁴

Publicly disclosing the modalities of accountability in legislation establishes a standard of disclosure that the central bank must meet on an ongoing basis. Having a legal requirement ensures that the public reporting by the central bank is done on a regular and consistent basis, establishes the principle of public accountability, and initiates a tradition of reporting that can foster an ongoing practice of transparent policymaking.

Application

Nearly all central bank respondents have the broad modalities of accountability specified in the central bank law. These modalities of accountability include published reports in the annual report, and written reports submitted to the legislature, published reports in an official bulletin, or public appearances by officials before the legislature.

The Law on the Bulgarian National Bank (Articles 49–51)¹⁵ requires the Bank to submit a report to the National Assembly twice a year, reviewing and assessing the Bank’s activities during the period, in addition to submitting its financial statements for publication in the official gazette.

The Czech National Bank Act¹⁶ requires the Bank “to submit to the Parliament a report on monetary development at least two times a year... [and] inform the general public on monetary developments at least once every three months.”

For the Eurosystem, the Statute of the ESCB¹⁷ requires the ECB to publish reports on the activities of the Eurosystem at least quarterly. The Statute also requires the publication of a weekly consolidated financial statement of the Eurosystem, and an annual report on the activities addressed to the European Parliament, the Council and the Commission, and the European Council. The Statute requires that all reports and statements mentioned under the Statute be provided to interested parties free of charge.

The Full Employment and Balanced Growth Act of 1978,¹⁸ directs the U.S. Federal Reserve to transmit independent written reports to both Houses of Congress twice a year. The Act also provides that the Board “shall consult with the appropriate Congressional committees on these reports and that each committee shall report its views and recommendations to Congress.”

Explanation and rationale

The authority to override refers to the case where a government has the power to overrule or change a decision of the central bank. If the government has this power, the way in which it is used (such as which exceptional circumstances justify its use) and how the public is informed of its use should be specified in the law.

Central banks are often given a high degree of institutional autonomy from the government to isolate the process of setting monetary policy from short-term political pressures. However, monetary policy is rarely conducted in isolation. The macroeconomic policies of the government are usually taken into account in the formulation of monetary policy in order to achieve a coherent and consistent macroeconomic policy. In exceptional circumstances, when there is a disagreement between the government and the central bank, the government may wish to override a particular monetary policy decision. The transparency of this process is enhanced if there are clear and publicly disclosed rules governing the conditions and manner in which this override occurs. This can improve the accountability of both the government and the central bank. Legislation provides an effective means of specifying the rules and procedures that govern these situations and how the public is informed when such a situation arises. Public disclosure of the conditions under which the authority to override may be invoked, and the manner in which it is publicly disclosed, also provide the public with reassurance that there are procedures in place for what is likely to be a rare event.

Application

Only about a third of the central bank respondents have some form of override provision. Legislation in some countries explicitly forbids the government from interfering with the policymaking process of the central bank. For instance, Article 3 of the Central Bank of Argentina Law¹⁹ states that “the Central Bank shall not be subject to any order, suggestion, or instruction given by the National Executive as regards the design and implementation of the monetary and financial policy.”

Of those countries that do have the provision, a significant majority specify the conditions under which this authority can be invoked in the central bank law. Most of the central bank respondents that have the provision also have the manner of disclosure specified in legislation.

The Bank of Canada Act contains the Government Directive, which outlines the conditions under which the Minister of Finance can issue a directive requiring the central bank to adopt a particular policy. The Act states that the Minister of Finance may “after consultation with the Governor and with the approval of the Governor in Council, give to the Governor a written directive concerning monetary policy, in specific terms and applicable for a specific period.” The Minister is required to publish any such directive in the government gazette and present it to Parliament “within fifteen days after giving thereof, or, if Parliament is not then sitting, on any of the first fifteen days the next thereafter that either House of Parliament is sitting.”²⁰ There have been no instances in which the directive has been invoked.

In Norway, the Central Bank Act²¹ states “The Council of State may adopt resolutions regarding the operations of the Bank. Such resolutions may take the form of general rules or instructions in individual cases. The Bank shall be given the opportunity to state its opinion before such resolutions are passed. The Storting (parliament) shall be notified of resolutions as soon as possible.” There have been no instances in which such resolutions have been invoked.

In the event of divergence of views between the government and the Bank of Uganda, the Economic Planning Minister may, with the approval of the cabinet, and by a directive in writing, determine the specific policy to be adopted by the Bank of Uganda, and submit the directive to parliament within a specified time frame.

Implementation considerations

When a government does not have the power to override the decisions of the central bank, it may have the power to dismiss the governor or the policymaking board. See 1.1.7 for further discussion. In some countries, a finance ministry official is a member of the central bank decision-making body by virtue of the office that the official holds. For instance, the finance minister or his deputy may be a member of the board of the central bank. Thus, the government may be able to influence policy at the level of the central bank without an override provision. To meet the transparency objective of this practice, there should be public disclosure of the fact that the government has the power to dismiss the governor on the policymaking board, as well as the role of the finance ministry on the policymaking board of the central bank.

Explanation and rationale

Procedures for appointment refer to the processes used to select and appoint a person for a position, such as the attributes or requirements of the office holder. For example, the procedures for appointment include the steps required before a person selected for a position is appointed, such as confirmation hearings. The terms of office relate to the tenure of the position, such as whether the term is fixed or determined at the discretion of some other office holder, and any restrictions on appointment and re-appointment. The criteria for removal cover possible grounds for dismissal from the position. The phrase “heads and members of the governing body of the central bank” refers to the executive positions within the central bank such as the governor and other appointed members of the central bank board or the body that oversees the operations of the central bank. These aspects of the appointment process should be specified in legislation.

Specifying the details of appointment, tenure, and dismissal in legislation provides the public with a clear understanding of the process governing appointments of the key decisionmakers of the central bank. Knowledge of the constraints and incentives facing these policymakers can deepen public understanding of how decisions on monetary policy matters are made, improving the transparency of the policymaking process. Disclosure of the procedures of appointment through legislation can also enhance awareness of who are the key policymakers. Public understanding of the criteria for dismissal of appointed heads and members of the governing board also allows the public and markets to make better judgments of the finality of monetary policy decisions, if there is a disagreement between the central bank and other units of government.

Legislative requirements can enhance the transparency of the appointment process, since they usually involve a set of specific and observable actions by senior government officials. For instance, many appointments that have specific legislative requirements require a minister or cabinet member to notify parliament of appointment decisions and publish details of the appointment in the government gazette or official journal. Some appointments require the legislature to confirm the appointment. Specifying the procedures in legislation thus triggers other forms and traditions of public disclosure.

Application

Nearly all countries have some form of legislative requirements for appointment to the governing body of the central bank. Many countries require appointees to be citizens of the country and have appropriate qualifications and experience. Some countries also forbid members of the governing board from holding outside employment or political affiliations. Nearly all central bank respondents have some requirements for appointment and dismissal specified in the central bank law. Many countries specify a maximum term of appointment for officials, and indicate whether reappointment is permitted and the maximum number of terms possible. A significant majority of central bank respondents have maximum terms of office specified in the central bank law.

In many countries, members of the governing board of the central bank can be removed from office (or are ineligible for office) if they are found guilty of misconduct or are convicted of a serious crime, if they are declared bankrupt, if they become incapacitated or unable to perform the duties of the office, if they are absent from several board meetings in a row, or if they accept employment or become a member of parliament. These criteria are typically specified in the legislation establishing the central bank. In addition to these grounds for dismissal, some legislation provides for the possibility of removing the governor from office for other reasons. The Governor of the National Bank of Moldova²² can only be removed from office by the Parliament with the vote of two-thirds of the total number of deputies.

In New Zealand,²³ the Finance Minister can recommend to the Governor-General that the Governor of the Reserve Bank of New Zealand be removed from office under a number of circumstances, including if he or she is satisfied that the Bank is not adequately carrying out its functions; that the Governor has not adequately discharged the responsibilities of office; that the Governor has obstructed, hindered, or prevented the Board from discharging its responsibilities under the Act; or that the performance of the Governor in ensuring that the Bank achieves the policy targets has been inadequate.

Implementation considerations

There are two types of approaches to setting criteria for removal from office of heads or members of the governing body: specific or general. The more specific the criteria for removal, the less possibility for misinterpretation or judgment in the application of the criteria.²⁴ However, listing specific criteria may risk excluding valid grounds for dismissal. Excessive discretion in decisions is not consistent with transparency. On the other hand, confirmation of any removal decision by other bodies involved in the nomination process promotes transparency.

Explanation and rationale

Monetary operations are actions taken by the central bank to implement monetary policy, such as influencing overall credit conditions in the economy. Fiscal operations are actions taken by the government to implement budgetary policies, such as revenue and expenditure measures, as well as issuance of public debt instruments and public debt management. The institutional relationship refers to the demarcation of roles between agencies responsible for monetary and fiscal operations. The institutional relationship is clearly defined if the public has a good understanding of the distinction between monetary and fiscal operations, and the responsibilities of the fiscal and monetary authorities.

There is often a substantial overlap between monetary and fiscal operations. For instance, government debt issuance or the monetization of budget deficits can have a significant impact on overall credit conditions in the economy. Similarly, absorbing large amounts of liquidity can have important budgetary costs for the government. Thus, fiscal operations can have substantial monetary consequences, and vice versa.

Most laws assign monetary policy functions to a central bank to benefit from the accumulation of specialized expertise and to remove monetary policy deliberations from political and budgetary considerations. However, governments often rely on the specialized financial expertise of the central bank to assist in the performance of various fiscal operations. Such fiscal operations may be beyond the narrow monetary policy mandate of the central bank. In order to ensure the clarity of the role and objectives of the central bank, it is important that a clear distinction is made between monetary and fiscal operations. This ensures that the appropriate institution is accountable for its actions and that policies are implemented most effectively.

Explanation and rationale

Credits, advances, and overdrafts to the government by the central bank are all forms of loans from the central bank to the government. The government or the central bank may have predefined rules or limitations on the extent of public borrowing from the central bank. The conditions and limits on these loans may include restrictions on the circumstances, size, amount, or duration of such loans.

Specifying the conditions for central bank loans to the government in legislation gives a clearly defined set of rules to guide monetary and fiscal operations. This ensures that the framework for monetary and fiscal operations is not subject to frequent and ad hoc changes that may make it more difficult for the public to understand the respective roles of these two units of government.

The central bank may lend money to the government in the course of performing fiscal operations for the government, or as a result of central bank financing of the public deficit. To ensure clear lines of responsibility and accountability, the central bank should disclose to the public any restrictions on such lending. This enables the public to assess whether the resources of the central bank are being used appropriately, and understand the extent of any restrictions on the use of those resources.

Application

Many countries prohibit any central bank lending to the government. A significant majority of those central bank respondents that are permitted to lend to the government have the conditions specified in legislation. Some countries (e.g. Lebanon, Malaysia, Mexico, Slovenia, Turkey, and West African Union) permit central bank lending up to a pre-specified limit, based on average government revenue or the capital of the central bank. This limit is publicly disclosed in legislation and in central bank publications.

The Law on the National Bank of Moldova²⁶ states that “for each loan there must be a written loan agreement executed between the Government represented by the Ministry of Finance and the National Bank. The agreement shall clearly state the principal amount of the loan, its maturity, and the applicable rates of interest and other charges.”

Explanation and rationale

The amounts and terms of credits, advances, or overdrafts refer to the details of central bank loans to the government. These details include, for example, the total amounts outstanding, the interest rates being charged, and the repayment period or maturity of the loans. The amounts and terms of deposits include the amount of government money held on deposit by the central bank, the interest rate being paid, and the duration or term.

The terms and conditions of loans and deposits are important factors that govern the relations between the government and the central bank. These conditions are important details that are necessary for the public to understand how the resources of the government and the central bank are being used to perform fiscal and monetary operations. The central bank and government are both more accountable if the public has a good understanding of the details of their financial relations.

Application

In some countries, the central bank law specifies some of the terms and conditions of central bank loans to the government, as well as deposits (see the example of Moldova in 1.2.1). A majority of central bank respondents that permit credit, advances or overdrafts to the government disclose details of government loans and deposits in the annual report, while many central banks publish reports in an official bulletin. Most countries reveal the amount of central bank loans to the government and the amount of government deposits at the central bank through their balance sheet statements. Some countries (e.g., Brazil, Morocco, and Zimbabwe) provide additional information in the balance sheet statement detailing the interest rates and maturities that apply. Some countries (e.g., Colombia, Georgia, and Nigeria) also provide public statements and more extensive information to the public on their lending arrangements to the government through statistical releases, the annual report, and appearances by officials before the legislature.

The Swiss National Bank does not provide credit to the government, but it discloses details of the interest rate that it pays on government deposits in its Annual Report.²⁷

Implementation considerations

Disclosure of central bank credit to the government or government deposits with the central bank can occur through the balance sheet statement of the central bank. However, balance sheets may not provide a full and meaningful picture of the financial relations between the central bank and the government if they do not adequately disclose all of the terms and conditions, or if they are not published in a timely manner. Full disclosure requires more detailed information than is usually presented in a central bank balance sheet.

Explanation and rationale

If the central bank is allowed to purchase government debt instruments when they are issued (i.e., in the primary market), or purchase and sell government debt from other parties after they have been issued (i.e., in the secondary market), the rules or procedures governing these transactions should be disclosed to the public. Such procedures may include the way in which the price is determined, the amounts of debt that the central bank is allowed to receive or sell, and any other restrictions that govern central bank sales and purchases.

Central banks often play a role in issuing or managing government debt, and may use government debt or securities for monetary operations. In order to ensure a clear demarcation of these different roles, it is important that the central bank and the government inform the public about the rules and procedures that govern debt operations. It is also important that market participants understand the degree of government involvement in debt markets to be able to price government securities efficiently.

Application

A majority of central bank respondents are prohibited from participating in primary issues of government debt, but many are allowed to participate in secondary markets. Some central banks have detailed regulations or internal rules governing central bank activity in government debt markets, and make these rules publicly available to market participants through circulars and bulletin articles, as well as press releases and public statements.

The rules and procedures governing auctions of government securities by the Bank of Canada are described in published documents available on the Bank of Canada’s website.  

Explanation and rationale     

In the course of conducting their operations, central banks interact with numerous private firms and companies, as well as other government institutions. Central banks may hire private companies to print paper currency, and central bank officials in some countries may be members of the governing bodies of other institutions. In order to assure the public that central bank involvement in the rest of the economy does not conflict with the central bank’s primary responsibilities and distract it from pursuing its objectives, the involvement of the central bank with other companies and institutions in most cases is limited to its primary mandate of implementing monetary policy. Central banks establish their own rules and procedures to guide their actions. Such rules and procedures should include provisions for public disclosure of the extent of the central bank’s involvement.

Application

Most central bank respondents follow principles and procedures for central bank involvement in the rest of the economy that are incorporated in legislation or regulations. Some central bank laws prohibit the central bank from holding equity in private companies. Other central banks have public tender processes where contracts to provide services to the central bank are decided on the basis of an open bidding process. Many central banks reveal the extent of their involvement in private companies in their annual reports, in addition to publicly disclosing the policies they have in place to ensure that such transactions are appropriate.

In some countries, central bank officials hold senior positions in other institutions. Many countries publicly require public disclosure of these arrangements in their statements to the public. The Governor of the Reserve Bank of Australia is also the chairman of the Payments System Board and is on the Board of the Australian Prudential Regulation Authority. Members of the Board of the Reserve Bank also serve on the boards of private companies. These arrangements are publicly disclosed in the central bank law,²⁹ in the Annual Report,³⁰ in press releases, and on the Bank’s website.³¹ The Reserve Bank of Australia also owns a printing company that produces the currency, the operations of which are detailed in the Annual Report.

Explanation and rationale

The profits of the central bank are the revenues generated in excess of expenses and other deductions. Central banks allocate their profits either by transferring funds to the government (after covering operating expenses and adding to reserves, if necessary), or by adding to their reserves. The capital of the central bank is the amount of funds directly invested by its shareholders (usually the government) plus accumulated retained earnings minus losses.³² The manner in which capital is maintained refers to the procedures or rules that the central bank follows to ensure that it has sufficient capital or reserves to meet its obligations and pursue its objectives. For instance, some central banks retain part of their profits to maintain a fixed level of capital, and transfer the residual to the government.

The central bank is a public institution that is endowed with a high degree of autonomy. The profits that the central bank earns arise because of the privileged position it occupies in the financial system. These profits usually arise from its monopoly over the issuance of currency, from open market operations, or from foreign exchange transactions. Since the assets and earnings of the central bank are part of the assets of the country, it is important that the central bank is accountable for how it allocates its profits and maintains its capital.

Sometimes the capital position of a central bank is impaired because of losses. If the central bank has insufficient capital, its ability to conduct monetary policy may be diminished. Public disclosure of the level of profits and capital and their allocation is necessary to ensure public confidence in the viability of the operations of the central bank. In the event of losses, public disclosure of the details of profit allocations also permits the public to gain a better understanding of the underlying reasons for the lack of profitability.

Application

Legislation in most countries requires that all profits of the central bank be transferred to the national treasury, after appropriate deductions for reserves and provisions to ensure the maintenance of a fixed level of capital. For a significant majority of central bank respondents, the manner in which central bank profits are allocated is specified in legislation. Public disclosure usually takes the form of publication in the annual report or government register, or submission of the financial statements of the central bank to parliament or legislature. Additional forms of disclosure include publication of the accounts in an annual report, press releases, or posting on a website.

The Bank of Japan Law³³ stipulates how profits are to be allocated, and requires the Bank to submit a profit and loss statement for the approval of the Minister of Finance every six months, within two months of the end of each six-month period. The Bank is required by the Law to keep the financial statements available for public perusal at its head office and branches. The bank also publishes its accounts on its website and in its Annual Report.³⁴

In Sweden, the Riksbank Act³⁵ states that the Bank’s profit and loss account and balance sheet are to be approved by the Parliament, which also determines the allocation of profit. The Bank publishes details of profit allocations in its Annual Report.

The Swiss National Bank and the Swiss Government have publicly disclosed a memorandum of understanding concerning the profits of the Bank. The memorandum specifies the mode of computing the profit, the use of the profit, and the size of the annual transfer to the government. The memorandum is renewed on a regular basis, usually every five years.

Explanation and rationale³⁶

Agency roles refer to the various tasks performed by the central bank on behalf of the government that do not relate directly to its monetary policy role. In performing agency roles, the central bank acts as a representative of the government and does not make independent policy decisions. Instead, the central bank carries out the decisions and directives of the government and confines itself to the practical details of implementation. Examples of agency roles include acting as the manager of external reserves or public debt, or providing banking functions for the government. Agency roles are clearly defined if the non-monetary policy responsibilities of the central bank are distinctly specified in an accessible document and there is a clear understanding that the central bank is merely implementing decisions taken by the government.

Defining agency roles clearly is necessary for the public to understand the extent of the policymaking responsibilities of the central bank and to hold the central bank and government accountable for their actions. The government may delegate some activities to the central bank, but the government is ultimately responsible for those activities. Clearly specifying agency roles ensures that there is no confusion over who has ultimate responsibility for setting and implementing policy. Clearly defining the non-monetary responsibilities of the central bank in this role as an agent of the government also enables the public to assess whether these responsibilities are interfering with the monetary policy duties of the central bank.

Explanation and rationale     

Central banks may perform several functions for the government related to its expertise in monetary management. Central banks often act as manager of domestic and/or external debt or foreign currency reserves, and may act as a fiscal agent by receiving money and making payments on behalf of the government. Central banks may also provide policy advice to the government, and handle relations with international organizations such as the IMF and World Bank.

When the central bank performs agency roles such as managing debt and reserves, or acting as an advisor or fiscal agent, the extent of these roles should be publicly disclosed. Public disclosure of agency roles may also include information on the reimbursement arrangements for the recovery of costs incurred by the central bank in fulfilling its agency roles on behalf of the government. This enables the public to understand how the resources of the government are being managed and by whom. Public disclosure of these roles also gives the public an appreciation of the responsibilities of the central bank.

Application

Many central banks provide the public with information on the agency roles that they play on behalf of the government. This information takes the form of press releases, publications written for a nontechnical audience, bulletin articles and annual reports, as well as appearances and public statements by officials.

The Reserve Bank of New Zealand publishes details of its agency functions in periodic bulletin articles³⁷ and in its Annual Report.³⁸ The Reserve Bank also provides brief fact sheets that describe the role of the Bank in managing debt and foreign exchange reserves in simple language that is accessible to a wide audience.³⁹

Explanation and rationale     

Primary debt issues are the initial placement of government debt with the public. Secondary market arrangements are the rules and procedures that govern subsequent sales and purchases of government debt. Depository facilities are the procedures for holding the title to government debt, in either paper or electronic form. Clearing and settlement arrangements are the procedures and practices involved in recording and finalizing the purchase or sale of government debt and the transfer of the title of ownership.

The financing of government expenditure has an impact on private sector liquidity and hence the effectiveness of monetary policy. Monetary conditions also affect the cost of issuing and servicing government debt. Poor coordination of debt management policies can lead to financial instability and increased uncertainty, and may retard the development of liquid debt markets and raise the cost of funding for the government. Thus, the coordination of policies, instruments, and information between the central bank and the agency responsible for issuing public debt is essential for stable macroeconomic management.

Government securities markets are often the most developed and liquid of all debt markets, and are used by a wide range of institutions to manage their liquidity. Many central banks use government debt instruments to implement monetary policy. Thus, the operational framework governing government securities markets is of critical importance to the smooth functioning of the financial system.

Public disclosure of the allocation of responsibilities between the central bank and the ministry of finance with regard to debt management issues reinforces the accountability of the responsible agency, and permits a clear demarcation of the different roles of the central bank and the government. A clear delineation of the responsibilities can help to facilitate the coordination of policies between the central bank and the debt management agency. It also provides the public with a better understanding and greater degree of confidence in the operation of debt markets, which may lead to greater depth, increased competition, and more efficient government securities markets.

Application

The Bank of Canada describes its debt management responsibilities in documents available on its website,⁴⁰ and in its Annual Report.⁴¹ These documents describe the services the Bank provides to the Canadian government, including advising on borrowings, managing new debt offerings, and servicing outstanding debt.

The Danish National Bank publishes an annual report on debt management⁴² that provides detailed information on the allocation of responsibilities between the Bank and the government, describes the principles behind the administration of debt, and summarizes developments in government borrowing and debt over the past year.

The Bank of Korea Act assigns responsibility for the issuance and depositary facilities of government debt markets to the Bank of Korea.⁴³ The Bank of Korea makes information about its agency function in government debt markets available on its website⁴⁴ and in its Annual Report,⁴⁵ describing the procedures it follows for the issue, sale or redemption of securities and giving data on the extent of its operations in government securities markets.

The allocation of responsibilities between the Treasury and the U.S. Federal Reserve System for government securities operations are periodically described in detailed Federal Reserve Bulletin articles and in the document Purposes and Functions.⁴⁶

Implementation considerations

The degree of coordination of policies between the central bank and the agency responsible for management of the public debt varies across countries and according to the level of financial development.⁴⁷ The need for public disclosure of responsibilities is equally important at all levels of financial development. In the early stages of financial development, close coordination of policies is necessary for stabilization and market development. Public disclosure of responsibilities is necessary to promote confidence in the operations of the markets and to promote public understanding. For more advanced financial systems, the coordination of policies can be better achieved through market forces, since there is greater scope for independent implementation of monetary, fiscal, and debt management policies.
 

II.  Open Process for Formulating and Reporting Monetary Policy Decisions

Explanation and rationale

The framework used to pursue monetary policy relates to the conceptual and institutional structure involved in the preparation and implementation of monetary policy. The instruments of monetary policy are the tools that the monetary authority uses to implement policy decisions, such as open market operations. Since the connection between the use of instruments and the ultimate objective(s) of monetary policy (such as price stability) is not direct, monetary authorities often select Atarget variables,” such as short-term interest rates, aggregate bank reserves, money aggregates, or the exchange rate. The central bank and its officials should describe and explain to the public the framework, instruments and any targets used to pursue the objectives of monetary policy.

This provision is key for transparency because it explains how monetary policy is conducted and the principles on which it is based. Public disclosure provides the background necessary to follow and understand developments in monetary policy. The effectiveness of monetary policies can be strengthened if the framework of policy and the policy instruments are known and understood by the public. Public explanation of the policy framework also can strengthen incentives for central banks to pursue their announced goals.

Application

In most countries, the framework, instruments and any targets of monetary policy are specified in legislation or regulations, and promulgated and discussed in reports to legislatures, appearances of public officials before legislatures, and releases to the media. A significant majority of responding central banks disclose the monetary framework through legislation, supplemented by statements in their annual reports.

For some central banks, the primary (and in some instances, the singular) means of public disclosure of their framework and instruments is through having those aspects of monetary policy noted in legislation, which is part of the public record. Those central banks that pursue specific monetary targets, and particularly those that follow an inflation target, have a tendency to issue a variety of public statements as a means of establishing their credibility (see Box 1). These central banks typically describe and explain the targets in considerable detail in their publications and public statements, including speeches, and in special inflation reports issued on a scheduled basis (quarterly, semi-annually or annually). In addition to issuing a public declaration of a numerical goal for inflation over a specified time frame, some of these declarations contain a description of the target—whether in a range or whether for more than one year, which price index is used, the underlying models used to determine the target, and whether there is any flexibility (“escape clause”) available in response to economic shocks.⁴⁸

In Australia, the framework and instruments of monetary policy are specified in legislation and the targets used to pursue the objectives of monetary policy are specified in written reports submitted to the legislature and in public appearances by central bank officials before the legislature. The framework and the targets are promulgated in the semiannual Statement on the Conduct of Monetary Policy (Inflation Report), issued jointly by the Governor of the Reserve Bank of Australia and the Treasurer (Finance Minister), with a quarterly update in the Reserve Bank’s monthly bulletin. The objective of monetary policy as expressed in the Statement on the Conduct of Monetary Policy is to maintain inflation at a rate of between 2 and 3 percent, on average, over the economic cycle.⁴⁹

The currency board rules that constitute the framework for Bulgaria’s monetary policy are clearly and strictly defined in the central bank law. The reserve requirement is defined in the Bulgarian National Bank’s Regulation No. 21; and the lender-of-last-resort facility, including the rules for using it, are contained in its Regulation No. 6.⁵⁰

The Bank of Canada Act (section 18) establishes the authority to grant advances and make interest payments and to set the rate for these. The Bank of Canada’s Discussion Paper I (November 23, 1995)⁵¹ explains the way in which the Bank’s overnight rate is used as an instrument of monetary policy. Canada’s inflation target is announced jointly by the Bank of Canada and the Department of Finance. A press release on the announcement of the target and explanatory comments on the target is issued as well. The Bank issues a biannual Monetary Policy Report (Inflation Report), which is updated quarterly in the Bank of Canada Review. The Bank ’s view on the transmission mechanism for monetary policy (the channels through which Bank’s use of monetary instruments, in the pursuit of the ultimate objectives of monetary policy, affect economic outcomes) is explained to the general public in the publication, “The Transmission of Monetary Policy in Canada,” available on the Bank’s website.⁵²

The framework and instruments of monetary policy of the Bank of Lebanon are specified and publicly disclosed in legislation; and monetary objectives, which include exchange rate stability and low inflation, are publicly disclosed and explained in published reports, an official bulletin and the Annual Report, and public releases to the media and posting on the web site.

The framework used by the Bank of Mexico to pursue the objectives of monetary policy, instruments and objectives are disclosed and explained in legislation, mission statement, written reports to the legislature, in the Bank’s Review and Annual Report, to the media and on the Bank’s website. In addition, it publishes a daily path for the monetary base consistent with the projected macroeconomic framework. It also publishes quarterly targets of the minimum accumulation of net foreign assets and the maximum growth of net domestic credit.

In New Zealand, the framework used to pursue the objectives of monetary policy is publicly disclosed and explained in a publicly released memorandum of understanding between the Minister of Finance and the Governor of the Reserve Bank of New Zealand, explained in official government publications, including a quarterly Monetary Policy Statement (Inflation Report),⁵³ the official central bank bulletin, ⁵⁴ the Annual Report,⁵⁵ and in press releases to the media and on its website. The inflation target is disclosed in a publicly released memorandum of understanding⁵⁶ between the Minister of Finance and the Governor of the Reserve Bank, and explained in written reports to the legislature, public appearances by officials before the legislature, published reports in the Review (the official central bank bulletin), the Annual Report, and through release to the media and on the website.

Poland recently introduced a new framework for the operations of the National Bank of Poland (NBP), which was clearly laid out and featured in its Annual Report 1998.⁵⁷ The basis for the new framework was established in a new Act on the NBP⁵⁸ and a New Act on Banking, both adopted in August 1997. The Act on the NBP stipulates that the basic objective of the NBP is to maintain price stability, and it is at the same time to support Government economic policies, insofar as this does not constrain the pursuit of the basic objective.

In the United Kingdom, the framework, instruments, and targets used for monetary policy are publicly disclosed in a number of ways. They are explained by legislation, through written reports, appearances before the legislature, publication in the official bulletin and Annual Report,⁵⁹ and releases to the media and on the website, as well as official speeches by the authorities. In particular, the Bank of England (BOE) publishes a quarterly Inflation Report.⁶⁰ The Chancellor, who plays a key role in publicly presenting the rationale for the policy objective, sets the monetary policy. The monetary policy objective is communicated to the Monetary Policy Committee of the BOE in the Annual Remit for the Monetary Policy Committee. The objective is also discussed in the Annual Remit and in the Bank’s quarterly Inflation Report.

Explanation and rationale

Procedures and practices governing monetary policy instruments refer to how the various monetary policy instruments are defined and made operational. Examples include procedures for access to the discount window or requirements for eligible collateral. These procedures should be explained to the public. Similarly, institutions responsible for foreign exchange policy, including institutions other than central banks, should define and explain procedures and practices governing foreign exchange policy instruments and operations.

Application

Most central bank respondents publicly disclose and explain the procedures and practices governing monetary policy instruments and operations. About half do so through legislation and by regulation. A majority publishes this information in the annual report and official central bank bulletin, as well as through public releases to the media.

Explanation and rationale 

The monetary authority should disclose the rules and procedures that govern its dealings with counterparties, such as primary dealers or commercial banks, as it goes about the process of implementing monetary and exchange policy or executing its fiscal agency role. The rules and procedures in this regard include the criteria for being a counterparty for monetary operations and the respective responsibilities for the central bank and the counterparties governing their relationships and transactions. Central bank dealings with counterparties in the foreign exchange market would also be included. In addition, there may be confidentiality requirements for counterparties and the central bank that are specified in rules and procedures.

This information is particularly helpful to firms that deal with the monetary authority, such as a buyer or seller of treasury bills in open market operations or as counterparties in foreign exchange market operations. In addition, it helps to assure the public and competing firms that these dealings are based on objective criteria, and therefore are fair and impartial.

Application

Most central bank respondents reported that the rules and procedures for the relationships with counterparties are publicly disclosed, typically in legislation and regulations. Common ways of disclosing this information included annual reports (about half) and the media (also about half). If publicly available, codes of conduct for dealers and such documents relating to dealings with the central bank can clarify eligible counterparties and help to ensure arms-length transactions in markets.

Many central banks disclose the names of their primary dealers with whom they engage in open market operations. For example, the Federal Reserve Bank of New York updates its list of primary dealers in government securities on its website whenever there is a change in the list.⁶¹ Similarly, the Bank of Canada maintains a list of primary dealers and government securities distributors on its website,⁶² as does the Bank of Norway.⁶³ The Bank of Japan publishes on its website (in Japanese) the criteria that a potential primary dealer must meet. The Bank of Brazil publicly discloses the rules and procedures for its relationships and transactions with counterparties mainly through its Circulars and Letter-Circulars, as well as through its information system (SISBACEN).

Explanation and rationale 

In the majority of countries, a central bank policymaking group plays an important role in formulating monetary policy. In some countries, the policymaking group is a formal board or committee made up of members who are appointed and have voting arrangements. For those countries that have such a policymaking group, there are certain attributes of the group that for transparency should be made part of the public record; in particular, who its members are, how they are selected, how it operates, and what role it plays in setting monetary policy. This is in contrast to a more informal policymaking group that is internal to the central bank, and functions as a deliberative body that decides monetary policy as a group or assists the Governor in making monetary policy decisions, but where the Governor has the ultimate authority to decide on monetary policy.

Disclosure of information about the policymaking body helps the public, and especially the financial community, to understand how this policymaking group functions and who its members are. Information on whether the ministry of finance or other government unit is represented on such a policymaking body—and whether such representatives have voting power or observer status—is useful to determine the influence of non-central bank appointees. Such information serves to make the policymaking body accountable for its policies. For the internal policymaking group, public disclosure of its composition and functions would provide the public with information about who is involved in policymaking and how policies are made. However, since the Governor is the ultimate decisionmaker, public disclosure about this internal group is less essential for transparency and accountability than for the formal policymaking group.

Application

Nearly all central bank respondents have some kind of policymaking body; however, in some cases, the group is internal to the central bank, and assists the Governor and participates in policymaking. Among those central banks that have a formal policymaking body (e.g., Algeria, Australia, Brazil, Chile, European Central Bank, Japan, Lebanon, Mexico, Poland, Switzerland, United Kingdom, and the United States), information on the composition and functions of the body is usually disclosed in legislation and supplemented by coverage in the annual report. The composition and responsibilities of Poland’s Monetary Policy Council, which began operations in 1998, are described in the National Bank of Poland’s Annual Report 1998 (p. 14). Among those that have an informal policymaking body (e.g., Botswana, Canada, and Israel), information on the composition and functions of the informal policymaking body may be less readily available to the public, although it may be discussed in the annual report.

Explanation and rationale

Advanced knowledge of the meeting schedule for the policymaking group alerts interested parties on a uniform basis when there may be significant developments in monetary policy. This knowledge could be taken into consideration in making financial market decisions, and could thus contribute to gradual market adjustments.

Application 

Of the countries with monetary policymaking bodies, a significant majority does not announce in advance the schedule of meetings, although most have regularly scheduled meetings. Of those that do announce the schedule of meetings, a significant majority does so by public release to the media, and fewer through the use of the website.

The monetary policymaking body of the Reserve Bank of Australia has regularly scheduled meetings, and an advanced meeting schedule is publicly disclosed in the Reserve Bank’s Annual Report. It is widely known that the Reserve Bank Board has for many years met on the first Tuesday of every month (except January).

The policymaking body of the Central Bank of Brazil has regularly scheduled meetings, and an advanced meeting schedule is publicly made available to the media. The schedule of meetings has been announced through November 2000.

The European Central Bank’s highest decision-making body (the Governing Council) has regularly scheduled meetings, scheduled one year in advance, and the schedule is made known to the public via the media and website.⁶⁴

According to the Articles of Incorporation of the Bank of Korea, the Monetary Policy Committee is required to meet on the first and third Thursdays of each month.

The Board of Governors of the Bank of Mexico holds regularly scheduled meetings, which are publicly disclosed in advance. The Board also meets daily to assess the behavior of domestic and foreign financial markets, and it may decide to change the monetary policy stance on a daily basis. The public is aware that the Board meets daily.

The State Bank of Pakistan announces the schedule of meetings for its monetary policy body in its official bulletin and to the media, approximately two weeks in advance.

In the United Kingdom, the Bank of England announces at the end of each year the meeting schedule of the Monetary Policy Committee for the upcoming year via public release to the media and through its website.⁶⁵

At the end of each year, a schedule for meetings of the U.S. Federal Reserve’s Federal Open Market Committee to be held in the upcoming year is issued; it is released to the general media, available on the Federal Reserve’s website,⁶⁶ and is also published in the Federal Register.

Implementation considerations

There are times, likely to be infrequent, when it is inappropriate or not feasible for a policymaking group to give the public advance notice for a meeting—for example, when a meeting is held to deal with an emergency situation.

Explanation and rationale 

When the monetary authority changes monetary policy, these changes should be announced and explained at the time, or soon after they occur. For example, if there is a change in the operating target for a particular short-term interest rate, this change should be announced and explained in a timely manner.

The effectiveness of monetary policies can be strengthened if the changes in policy instruments are publicly announced and explained in a timely manner. Such disclosure ensures equal access to information about monetary policy decisions. Explaining policy changes helps to shape expectations and thus makes policy more effective, and it also promotes public accountability for policy choices.

Application

Most central banks publicly announce and explain decisions to change monetary policy. Of those that do, a significant majority provide explanations immediately after the decisions. Most central banks do so by public release to the media, followed by further explanations in public statements by officials and in publications, such as the central bank’s bulletin and annual report.

Changes in the setting of monetary policy instruments by the Reserve Bank of Australia are publicly announced and explained immediately after the decisions by media release (published instantly on screen services) and by posting on the website. Policy changes are announced on the day that the change is to be effective, generally at 9:30 a.m.—the same time that the Reserve Bank announces its dealing intentions for the day. Further subsequent explanation and discussion are contained in other forms such as in the Bank’s Bulletin and Annual Report.

Changes in monetary policy by the Central Bank of Brazil are announced and explained immediately after the decision by public release to the media and publication in an official bulletin, as well as through SISBACEN—the main information system and data base of the Central Bank of Brazil.

Changes in the setting of monetary policy instruments by the Bank of Estonia are publicly announced and explained soon after the decision. Usually, the media is given notice of such a change on the following banking day. According to the Law on the Bank of Estonia, all decisions made by the Board of the Bank of Estonia resulting in the establishment of norms are required to be published in Riigi Teataja (the official publication of the Parliament). Decrees and regulations of a normative nature issued by the Governor and decisions of the Board are also published in Riigi Teataja.

The European Central Bank (ECB), after each meeting of the Governing Council, issues a press statement. In addition, a regular press conference is held after the first meeting of each month, including a question-and-answer session with the press. If a monetary policy decision is taken, the President of the ECB announces and explains the decision at the press conference. When an interest rate decision is taken at a meeting, other than the first meeting of the month, it is announced in a press release. 

Monetary policy changes by the Bank of Mexico are announced and explained immediately after the decision by announcements to the press, on the website, and then in the Annual Report. In particular, the Bank of Mexico announces the daily target for the total balance in the current accounts of credit institutions, and the public is advised at the time a policy decision is made of any change in the target.

In the United Kingdom, the Bank of England announces and explains changes in the setting of monetary policy instruments immediately after the decision by public release to the media and on the website. These changes are also discussed when officials appear before Parliament, and are published in the quarterly Inflation Report and the Annual Report. The requirement to publish statements about monetary policy decisions is covered in Section 14 (1)–(5) of the Bank of England Act 1998.

Changes in monetary policy are announced and explained immediately after the decision by the U.S. Federal Reserve Board or the Federal Open Market Committee (FOMC) by release of a public press release to the media and on the website, usually with some explanatory comments, and by publication in the Federal Reserve Bulletin and the Annual Report.⁶⁷ Minutes of the FOMC meeting, which provide background and reasoning behind the decisions, are released to the public, and are available on the Federal Reserve’s website shortly after the following meeting of the FOMC; they are also published in the Federal Reserve Bulletin and in the Annual Report.

Implementation considerations

Key issues are what constitutes a timely manner, how much detail should be disclosed, and at what point. In addition, the manner of announcing is also important to ensure that the information is available to all on an impartial and uniform basis. If some obtain the information before others, they may be able to achieve a financial gain.

Another issue is whether a statement should be made at the conclusion of a scheduled meeting that no policy change has been made if there has been no change in monetary policy. For example, the Czech National Bank and the National Bank of Poland follow this practice by informing the public that no monetary policy action has been taken.

Explanation 

The main considerations underlying changes in monetary policy may be more or less detailed, depending on the tradition and context. The timing of such explanations should be specified in advance, so that the monetary authority meets the time requirement and the public can be watchful and confident that the information will be forthcoming on a regular basis. Also, timeliness of such information is of key importance. Under some circumstances—e.g., if there are successive changes in the same direction and for the same reasons—such explanations or assessments might be relatively brief or summary in nature.

Application

The majority of the respondent central banks disclose the main considerations underlying their policy decisions within a preannounced maximum delay. Of those that do make such disclosures, many do so within two weeks, or provide the information prior to the next scheduled meeting of the central bank’s policymaking committee. Common ways of disclosure include providing a statement of the main considerations underlying the central bank’s monetary policy decisions to the media and published in the official bulletin. A significant majority of those disclosing the main considerations underlying policy decisions provide a summary. Others offer more elaboration via press release of minutes or a policy record of the policymaking committee.

The Central Bank of Brazil discloses the main considerations underlying its monetary policy decisions within two weeks or less following a decision. A summary of these considerations of the policymaking meetings is disclosed to the media and through SISBACEN (the information system and database maintained by the central bank and made available to the market). As of January 2000, minutes of the meetings of the Monetary Policy Committee (COPOM) have been released to the public with a lag of seven days. Prior to June 1999, the minutes of the COPOM meetings were released with a lag of four to five months (the minutes of a given meeting were released after the three subsequent meetings had taken place); and between June 1999 and January 2000, the minutes were released with a lag of 15 days.

Key features of the European Central Bank’s communication policy relating to its monetary policy decisions are the monthly press conferences given by the President and the Vice-President, and the Monthly Bulletins. During the press conferences, the President makes an introductory statement summarizing the Governing Council’s discussions and conclusions before answering questions from journalists. Against this background, monetary policy decisions and the main underlying considerations are disclosed immediately after a decision is taken. In addition, members of the Governing Council of the ECB give interviews in order to explain monetary policy decisions, which are made from a euro area-wide perspective, in both the euro area and national context.

The Bank of Japan publicly discloses the main considerations underlying its monetary policy changes by a press release that is also posted on the website on the day of such policy changes. As required by Article 20 of the Bank of Japan Law, the Chairman of the Policy Board shall publish a document that outlines the discussion of each Policy Board meeting on monetary policy matters, which include dissenting votes, as well as the transcript of such meetings⁶⁸. Minutes of policymaking meetings on monetary policy matters are published three business days after the following two policy Board meetings, while the transcript of the policymaking meeting is published with a ten-year lag.

The Bank of Korea holds a Governor’s press conference immediately after the monthly monetary policy decisionmaking meeting by the Monetary Policy Committee where the main considerations underlying its monetary policy decisions are disclosed. Further explanations are made in written reports to and appearances before the National Assembly. The disclosure takes the form of summary statements and minutes of the policymaking meeting.

The Central Bank of Libya releases a summary of considerations of its policymaking meeting prior to the next scheduled meeting. It is submitted to the legislature, and published in official central bank publications and in the Annual Report.

The Bank of Mexico publicly discloses a summary of the main considerations underlying its monetary policy decisions prior to the next scheduled meeting of the policymaking committee by releases to the media and on the website; the decisions are further explained in the official bulletin and the Annual Report.

The State Bank of Pakistan discloses the main considerations underlying its monetary policy decisions, usually through circulars and published reports in the official bulletin and in releases to the media. Generally, the explanations are included in the circulars announcing the policy decisions, which are released immediately after the policy decisions are made.

In the United Kingdom, the Bank of England issues a press release/market notice immediately after the Monetary Policy Committee (MPC) makes an interest rate decision, giving details of the decision and sometimes giving the main reasons for the decision. The main considerations underlying MPC monetary decisions are disclosed within two weeks after an MPC meeting. The principal channel for disclosure is the publication of the minutes of the MPC. The Bank of England Act 1998 (Part II, Clause 15) states that the minutes of MPC meetings must be published within six weeks of the MPC meeting, and dissenting votes must be noted. The lag in publishing the minutes was reduced from six weeks to two weeks as of October 1998. Disclosure is further enhanced by public appearances by MPC members before Parliamentary Committees and the publication of the quarterly Inflation Report.

In the United States, the main considerations underlying the U.S. Federal Reserve’s Federal Open Market Committee (FOMC) monetary policy changes are disclosed in a press release and posted on the Federal Reserve’s website on the day of the meeting at which the policy decisions are made—see 2.3. This information is supplemented by release of the minutes of the FOMC’s meeting several days after the conclusion of the subsequent FOMC meeting, including a record of any vote on policy issues, with the dissenting votes identified with their rationale. Further discussion and explanation is provided by Federal Reserve officials before Congress and in public speeches. Transcripts of FOMC meetings are released with a five-year lag.

Implementation considerations

One practical consideration concerns how much detail to provide in the main considerations. Three central banks—the Bank of England, the Bank of Japan, and the U.S. Federal Reserve’s Federal Open Market Committee—indicate dissenting votes, as well as the explanations offered by those casting dissenting votes. Some central banks, such as those in Japan and the United States, publish a transcript after a number of years. The degree of disclosure concerning the discussion is a critical issue because if there is too much disclosure, including the identification of individual policy board member’s views and positions, members may be reluctant to speak frankly.⁶⁹ For countries such as the United Kingdom that require individual accountability for each of the members of the Bank of England’s Monetary Policy Committee, full disclosure is an essential feature to achieve such accountability.

If the main considerations are provided with a long lag, they are of limited use. Also, if there are leaks, the result may yield unfair advantage for those privy to these leaks. If there is too much detail, it may be difficult for the public to “see the forest for the trees.” Moreover, market-sensitive information arising in the course of the proceedings of a policy meeting (if released when it is still market sensitive) may cause excessive or unnecessary volatility in financial markets.⁷⁰

In addition, there is the issue of how much transparency is appropriate concerning policymakers’ views on the transmission mechanism for monetary policy. Given the current state of macroeconomics, policymakers in general do not disclose the reasons that a particular magnitude of change was made rather than a larger or smaller change.

Explanation and rationale 

The monetary authority should provide some longer-term assessment of monetary policy, in particular, the extent to which the main objectives or goals of monetary policy are being achieved. In addition, this kind of assessment is most useful if it includes a forward-looking focus, indicating the prospects for achieving the monetary policy objectives. The kind and frequency of the monetary policy assessment may depend on the monetary policy framework. For example, inflation-targeting countries commonly issue comprehensive “inflation reports” (see 2.1), while for countries with fixed exchange rate regimes such assessments may be shorter and less frequent.  

It is important for public understanding of monetary policy to have an authoritative assessment of progress, challenges, and prospects with regard to the main objectives of monetary policy. Moreover, such an assessment helps the public to form a judgment about the performance of the policymakers, as well as establishing the central bank’s accountability.

Application 

Most central banks issue periodic public statements on progress toward achieving their monetary policy objectives and the prospects for achieving them. A majority of those do so either quarterly or annually. Reports to the media and annual reports are popular methods of providing such reports.

The Reserve Bank of Australia publishes quarterly reports on its assessment of the Australian economy and progress toward achieving its monetary policy objectives. Since 1997, two reports a year have taken the form of the Semi-Annual Statement on Monetary Policy (Inflation Reports), which are released to coincide with the Governor’s testimony before a parliamentary committee. These documents, which are required by the Statement on the Conduct of Monetary Policy to include information on the outlook for inflation, are first published as a “stand alone” document and subsequently in the Reserve Bank Bulletin, as well as posted on the Bank’s website.

The Central Bank of Chile issues periodic public statements on progress toward meeting its monetary policy objectives. As provided in sections 78-80 of the central bank law, commonly referred to as “The Act,” the Bank of Chile submits two annual reports, one to the Ministry of Finance and the other to the Senate. The first of these, which contains information about programs and policies executed the previous year, must be sent (and available for public consultation) no later than April. The second report must be submitted no later than September, and contains information on the performance of policies and programs and the economic outlook for the rest of the current calendar year and the following year. The latter report is presented in an open meeting in the Senate, including a speech by the President of the Central Bank. Both reports are released to the media and include a reference to the legal requirement of their release.

The European Central Bank (ECB) releases an introductory statement on its website on behalf of the President following the monthly press conferences, and issues periodic assessments in its Monthly Bulletin. After the first meeting each month the President of the ECB holds a press conference and describes the Governing Council’s assessment of the monetary, financial and other economic situation as well as the outlook for price developments and the risks to price stability.

The Bank of Israel publishes status reports on monetary policy objectives twice a year in its Review and releases them to the media. Since 1998, the Bank has published an Inflation Report twice a year explaining monetary developments and the required policies to achieve the inflation target, which is the ultimate target for its monetary policy.

The Bank of Korea submits a Monetary Policy Report to the National Assembly biannually.

The Reserve Bank of New Zealand Act of 1989 requires the Reserve Bank of New Zealand to publicly issue a comprehensive report at least every six months explaining its monetary policy decisions, discussing conditions affecting monetary policy and analyzing the performance and effectiveness of monetary policy. In practice, the Reserve Bank issues these reports on a quarterly basis.

The National Bank of Poland issues periodic public statements on progress toward achieving its monetary policy objectives, by issuing press releases after its Monetary Policy Council meetings, and through its quarterly Inflation Reports, and its Annual Report.

In the United Kingdom, the Bank of England issues public statements (the “Inflation Report”) on progress toward achieving its monetary objectives each quarter. In particular, the Bank has a televised press conference on the day the quarterly Inflation Report is published. Furthermore, members of the Monetary Policy Committee regularly appear before Parliamentary Committee, and speeches and reports are contained in the official bulletin and Annual Report, in public release to the media, and on the website.

The U.S. Federal Reserve System is required by legislation to report semiannually on its monetary policy objectives to the public by means of written reports submitted to, and public appearances by officials before, the Congress. The reports are also published in the Federal Reserve Bulletin and posted on the website.

Implementation considerations

The appropriateness of central bank public comments on the prospects for achieving some economic policy objectives is under discussion in some central banks. In some areas, central banks are reviewing how transparency can best contribute to the conduct of monetary policy, particularly regarding the expression of views to the public about the future path of monetary conditions. Transparency about policies is complicated by the fact that public comments on policy may be conditional and addressed to two distinct audiences—the market and the public at large—and the same statement at times carries different meanings for these audiences.

Explanation and rationale

This provision specifies some key elements to be covered in the periodic assessment of monetary policy. The central bank’s presentation should include the reasons behind the policy stance as well as key assumptions, and, where applicable, quantitative targets.

The effectiveness of monetary policies can be strengthened if the objectives of policy and their rationale are known and if the authorities make a credible commitment to meeting them. Where applicable, quantitative information is useful to the public and the legislature in assessing the performance of monetary policy and in holding the central bank accountable for its actions. In addition, disclosure of key assumptions is useful in assessing the feasibility of monetary targets and goals.

Application

Most respondent central banks periodically present their monetary policy objectives to the public, including the rationale and key underlying assumptions. About two-thirds report this type of information annually, while about one-third do so quarterly.

The Reserve Bank of New Zealand has made considerable efforts since inflation targeting was introduced to promote public understanding of monetary policy, inflation targeting, the importance of price stability, and related issues. It has done this on a focused basis, designing and disseminating information according to the particular needs of different audiences. Communication initiatives include: speeches, bulletin articles, pamphlets, information releases, school information packages, annual reports, newspaper articles, news media interviews, and media briefings.

In the United Kingdom, the Chancellor of the Exchequer, who presents the rationale for the policy objective, sets the monetary policy. The objective is communicated to the Bank of England’s Monetary Policy Committee via an Annual Remit, which is made available to the media and the public.

Implementation considerations

A key issue concerns how much detail to disclose, including whether to disclose the central bank’s forecast, and the main assumptions behind it.⁷¹ In addition, central banks may decide to adopt an active stance in promoting public understanding of monetary policy objectives and related issues, including the need for information to be targeted to different audiences, based on their level of understanding, familiarity with economic issues and likely sphere of interest. In this regard, transparency may not be effective unless it is accompanied by measures to strengthen public understanding of the issues involved, which in turn may require considerable effort on the part of the central bank in terms of the determining audience needs, the design of information, and the techniques for the dissemination of information.

Explanation and rationale

Key aspects of the macroeconomic situation include, inter alia, measur