The communication should explain and convey, as clearly and precisely as possible, the objective and how it will react to any deviations from that objective. Put simply, it should convey monetary policy’s reaction function, so as to avoid unnecessary uncertainty. This should give economic participants a better understanding of how monetary policy will respond to new information.
Thus, they can adjust their expectations about interest rates and inflation of their own accord, and hence their response to new information, such as an unexpected oil price hike. And because they do this, the central bank itself does not have to react as much to the changed economic setting. But what exactly does good central bank communication look like?