And  BIS Review 54/2006  3  yet, because of the unique circumstances over the past two to three years, it has provided more information about the near-term path for monetary policy than has been the practice of many of our counterparts. These differences in approaches to communication do not seem to reflect fundamental differences in perceptions of the degree or nature of uncertainty. The proponents of the regimes with the most explicit forecasts and greater disclosure about the future path of interest rates do not claim to have greater confidence in their ability to forecast. They do express, however, greater comfort with some of the potentially adverse consequences of such approaches, the tendency, for example, for observers to gravitate toward the central tendency of the forecast and to look past the uncertainty bands and qualifications. And they express less concern that these approaches to communication will end up limiting the flexibility of central banks to react as circumstances change without inducing damaging volatility into markets. And so, even as central banks have moved in varying degrees toward greater clarity about their goals, forecasts and policy decisions, they have also moved to being more explicit about uncertainty and about the need for flexibility in how policy should adjust over time. This reflects an evolving appreciation that there are limits to transparency.
Transparency in monetary policy cannot mean that the central bank conveys more confidence in the outlook for growth and inflation than it can reasonably have, and it cannot provide more assurance about the likely future course of policy than it actually has. This seems self evident. And yet as central banks have moved to communicating more and disclosing more about monetary policy, transparency in monetary policy has been associated with rising expectations for clarity about the path of target interest rates over time. It might seem desirable in an ideal state of the world for expectations in financial markets about the future course of policy to closely track in real time those of the central bank. But given the degree of uncertainty that surrounds monetary policy making, this is unlikely to be possible, except in special circumstances. There will be circumstances when it is appropriate for the central bank to send a signal about the target rate that extends well beyond the immediate horizon. These circumstances are not likely to arise frequently, and will be appropriate in particular conditions when the benefits afforded by the effect on expectations clearly outweigh the cost imposed by the loss to flexibility. Central banks should be clear about what they are trying to achieve. They should be open with the knowledge and insight they possess. And they should provide the public with clarity where it is attainable.