In the past few years, there has been a trend among central banks with higher frequency monetary policy-setting meetings reducing the number of times they meet. The Bank of Japan reduced the number of meetings from 14 to 8 in 2016. The Bank of England and European Central Bank reduced the number of meetings from 12 to 8 starting from 2015. Most recently, the Reserve Bank of New Zealand also reduced the number of monetary policy meetings, but by much less – to 7 from 8 starting from July 2016. (Closer to home, Bank Negara Malaysia reduced the number of meetings much earlier – from 8 a year to 6 a year starting from 2010, arising from the enactment of the Central Bank of Malaysia Act 2009, which states that the Monetary Policy Committee (MPC) shall meet at least six times in a year). Central banks seem to have gravitated towards having between 6-8 meetings a year, with 33 of 63 central banks sampled[1] meeting this often in 2017. In a world of 24-hour news cycles and instant Instagramming our every move, why have central banks gone the other way and reduced the number of times they meet? Could this trend continue?
Both the Warsh Review (a review commissioned by the Bank of England in 2014 of its transparency practices) and the European Central Bank highlighted that the economic landscape changes much slower than monthly policy changes would warrant. Changes in economic assessments and changes in the economic outlook require persistent changes in data, which is unlikely to be apparent on a monthly basis. The Warsh Review noted that Monetary Policy Committee (MPC) members may thus feel prodded to refine judgments and policies more frequently than prudent. President of the European Central Bank Mario Draghi said something similar – that the medium to long term outlook for the assessment on inflation meant that monetary policy measures were not taken on the basis of short-term considerations, and thus that a monthly frequency for meetings was ‘simply too tight’ (European Central Bank, July 2014).
Policymakers are, as they should be, also at great pains to think deeply about the economic outlook and risks prior to each policy meeting. Meeting too frequently could be detrimental to policymakers’ thinking process. The Warsh Review argued that meeting monthly gave less opportunity for reflection, not just by policymakers but also the staff. Time for reflection is needed not just for issues pertaining to the immediate policy decisions, but for active reflection of longer-term issues. The Bank of Japan also reduced the frequency of meetings in part to ‘further enhance deliberations (Bank of Japan, 2015).
For many of the central banks, meeting too frequently is believed to cause heightened market expectations in the lead-up to the meetings, which could cause unnecessary volatility. The Warsh Review cited heightened market expectations as one of the reasons that the Bank of England should consider reducing the frequency of their MPC meetings. The revised schedule of monetary policy meetings at the Reserve Bank of New Zealand introduced a clear rule for the release of their monetary policy decisions, stating that this will give the financial markets ‘clarity over a longer timeframe to enable more efficient risk management and pricing of financial instruments’ (Reserve Bank of New Zealand, 2017). President Draghi, in responding to media questions on the reasons for the reduced frequency of policy-setting Governing Council meetings, said that the then-prevailing monthly meetings led to financial market expectations on a monthly basis of monetary policy action, which created market behaviour that may have little to do with economic fundamentals.
Lastly, a desire to improve communication on monetary policy also led central bankers towards deciding to meet less frequently. Paradoxically, meeting less, and thus communicating less on actual policy decisions, may actually increase the ability to communicate more effectively. For the Bank of England, in particular, a combination of the previous two-week delay in publishing the minutes of the MPC meeting, which contains the votes of the individual members, and the black-out period prior to the next MPC meeting, meant there was often a ‘flurry of speeches and op-end articles from different MPC members in this approximate 10-day window, according to the Warsh Review. This sudden avalanche of communication, followed by silence, could create market and public confusion.
Thus, for many of these central banks, the decision to reduce the frequency of meetings was not done in isolation, but as part of an overall review of the monetary policy processes to achieve higher-order objectives such as enhanced communications or transparency. For example, the Bank of England’s decision to reduce the frequency of MPC meeting was made alongside the decision to also publish the minutes of the MPC meetings and the Inflation Report at the same time as the policy decision. The Bank of Japan and European Central Bank also reduced the frequency of their policy meetings alongside publishing more detailed policy documents – the European Central Bank now publishes the ‘Account of the monetary policy meeting’, which is described as ‘accounts of Governing Council monetary policy discussions’ (European Central Bank, December 2014). The Bank of Japan also decided at the same time to not just increase the frequency of the publication of their Outlook for Economic Activity and Prices from semi-annually to quarterly and to publish a summary of opinions presented after each policy meeting about a week after the meeting, but also to publish individual economy and prices forecasts by its policymakers.
The reduced meeting frequency would in fact facilitate this more onerous publication schedule, because as described by President Draghi, ‘if one wants to have published accounts of the meetings, it gets a little complicated to have an account if you have monthly meetings. It’s easier to have it if you have every six weeks, because it gives space for producing the account in a way that doesn’t disturb the expectations for further action and doesn’t in a sense confuse the reception by the markets of the previous action that’s been taken’ (European Central Bank, July 2014). The re-adjusted schedule would also tie in better with the publications, as suggested by the Bank of Japan – it described the shift to 8 meetings a year as reflecting the quarterly publication of their report on the outlook, while taking into account that it was necessary to meet in the interim periods also.
What guidelines can central banks use in deciding how often to meet?
There are 3 principles that need to be juggled in determining the frequency of meetings, as highlighted by the Bank of England (Bank of England, 2014). The frequency of policy meetings should reflect the frequency with which underlying economic conditions evolve, while taking into consideration the resources that each meeting absorbs and maintaining the flexibility to conduct unscheduled meetings. As discussed above, in the absence of shocks, underlying economic conditions do evolve gradually, although the term “gradual” is subjective. Resources includes staff manpower in preparing materials for meetings, policymakers’ resources in preparing for meetings, and the opportunity cost of that time which could perhaps be better served by pursuing other objectives, such as research into longer-term issues. The Warsh Report succinctly described this challenge:
‘Under the MPC current monthly cycle, intensive preparation is required by Committee members and Bank Staff alike. For the Bank Staff, for example, time is consumed with the preparation of materials for the meeting, framing of key issues for the actual deliberation, and then documenting the discussion that transpired to arrive at the meeting’s decision.
MPC members spend many hours reading and digesting the comprehensive briefing given to them by Bank staff, familiarising themselves with the latest developments in the economic conjuncture, and formulating their views on the appropriate policy stance. After the policy meeting, assiduous preparation and review of the minutes is needed. And no sooner has this process finished that the preparations for the next policy meeting begin.’
(Warsh 2014: p.36)
In terms of maintaining flexibility to conduct unscheduled meetings, all central banks have retained full flexibility to meet for additional meetings if required, safeguarding the ability to meet should situations, such as a crisis, warrant an unscheduled meeting.
Could central banks head towards reducing the frequency even further?
Meeting “less frequently” is arbitrary – what makes meeting 6-8 times a year superior to meeting four times a year, or even twice a year? Some central banks, such as the Swiss National Bank, meet 4 times a year. On the other hand, with the advent of even faster-moving data, and better technological capabilities to handle and interpret large volumes of data, could central banks come full circle and increase the frequency of meetings once again?
References:
Bank of England. (2014) Transparency and Accountability at the Bank of England. Available from: https://www.bankofengland.co.uk/-/media/boe/files/news/2014/december/transparency-and-the-boes-mpc-response
Bank of Japan. (21 July 2015) Minutes of the Monetary Policy on June 18 and 19, 2015. Available from: https://www.boj.or.jp/en/mopo/mpmsche_minu/minu_2015/g150619.pdf
European Central Bank. (18 December 2014). ECB to publish accounts of monetary policy discussions from January. Available from: https://www.ecb.europa.eu/press/pr/date/2014/html/pr141218.en.html
European Central Bank. (3 July 2014). Introductory statement to the press conference (with Q&A). Available from: https://www.ecb.europa.eu/press/pressconf/2014/html/is140703.en.html
Reserve Bank of New Zealand. (26 August 2017) RBNZ MPS, OCR, FSR dates for 2016-2017. Available from: https://www.rbnz.govt.nz/news/2015/08/rbnz-mps-ocr-fsr-dates-for-2016-2017
Warsh, K. (2014) Transparency and the Bank of England’s Monetary Policy Committee. Bank of England. Available from: https://www.bankofengland.co.uk/-/media/boe/files/news/2014/december/transparency-and-the-boes-mpc-review-by-kevin-warsh.pdf
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About the author:
Sabrina Bashir is a senior economist at the Monetary Policy Department, Bank Negara Malaysia.
Views expressed within are solely those of the authors and do not necessarily reflect the position of Bank Negara Malaysia
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