Central bank communication, inflation rate, and inflation expectations in South Africa

Abstract

This research investigates the influence of the South African Reserve Bank’s (SARB) communication on monetary policy on inflation rate and inflation expectations of various market participants. Previous research on central bank communication has focused on those in Europe or the United States, whereas the authors are the first to examine those from the SARB, and furthermore, employ a novel methodology. Specifically, the authors construct three indicators of central bank communication to measure dimensions of clarity, tone, and subjectivity. The authors utilize these indicators to examine how central bank communication regarding monetary policy affects inflation rate and inflation expectations of various market agents, employing a structural vector autoregressive model. The findings suggest that while clarity in communication does not directly affect inflation or inflation expectations among heterogeneous agents, it exerts a negative feedback effect on the policy rate itself. Furthermore, the authors find that sentiment acts as a potent exogenous driver, exerting significant negative pressure on inflation expectations and having an immediate impact on inflation rate. These results suggest that the SARB can effectively use communication strategies to influence future policy decisions. Hence, effective central bank communication can enhance the transmission of monetary policy.