This helps markets, businesses and consumers to better formulate expectations about future movements and adjust their actions accordingly. We have to admit that, in times when the standard monetary policy instruments have been bounded, there is a need for a supplementary tool to help preserve market expectations, primarily about continuous accommodation in the economy.
As such, communication about the possible trajectory of monetary policy tools (first, interest rates; later – also asset purchases) has become a distinct monetary policy tool unto itself. To grasp the significance of this operational shift, we can recall that communication has not always been an item on the central banks’ agenda.