Communication can help anchor inflation expectations, which in turn helps enhance the effectiveness of the regime. There is strong evidence that anchoring of inflation expectations has been enhanced over the past 25 years.16 It is also important the central bank’s reaction function is understood. That is helpful for the effective and timely transmission of monetary policy.
It helps ensure that inadvertent monetary policy surprises don’t occur, which serves to enhance the overall credibility of the regime. This communication is important for businesses and households in their decision-making. On the basis of their outlook for the economy, they can have confidence in how the central bank is likely to react and what that would imply for their borrowing costs.