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Quo vadis BI’s policy communication?
Research director at the Socio-Economic and Educational Business Institute (SEEBI) Jakarta and lecturer at the State University of Jakarta’s School of Economics
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em>Research director at the Socio-Economic and Educational Business Institute (SEEBI) Jakarta and lecturer at the State University of Jakarta’s School of Economics. The views expressed are his own.
The results of Bank Indonesia’s (BI) board of governors meeting from Nov. 20 to 21, seemingly leave a little bit of contradiction.
On the one hand, BI decided, starting Jan. 2, 2020, to ease the reserve requirement to promote liquidity in the money market. In BI’s point of view, the availability of liquidity is required for the banking industry to conduct financial intermediary functions. The increase in bank loan capacity, in turn, will preserve the momentum of domestic economic growth amid the global economic downturn.
On the other hand, BI at the same time issued a projection of bank loan growth. The bank loan growth target throughout this year was cut to 8 percent, while the figure for next year is slightly higher. This means that BI does not anticipate any dramatic increase in the demand for loans.
As a result, the release of reserve requirement easing and at the same moment the downward revision of bank loan growth potentially raises confusion.
First, market participants may be herded to be more realistic about the unfavorable economic conditions. In essence, bank loan growth is considered to follow economic movements. Consequently, bank lending cannot be forced to grow faster anymore.
Second, BI in contrast would like to send a signal of optimism. The distribution of bank loans to the productive economic sectors is needed to maintain economic growth. If this assumption holds, the causality runs from bank loan to economic performance. In this case, the reserve requirement relaxation is an early anticipation.
The two possible interpretations above are right for their own reasons. Generated by nonuniform perception, the interpretations would be different, or even contradicting each other.
The different interpretations bring diverse responses. And the diverse responses offer divergent implications for achieving the policy objectives.
Of course, BI may have some distinctive considerations in deciding the reserve requirement cuts as well as revising the bank loan growth target downward.
However, again and again, multiple interpretations of particular information is quite risky for BI to achieve the ultimate policy goal.
The crucial point of communication in supporting the effectiveness of a policy has long been recognized by the central banks. Nevertheless, the realization was only significantly felt lately, especially since the 2008 global financial crisis.
In the conceptual perspective, central bank communication is right at the heart of monetary policy, as cited by Mario Draghi, former president of the European Central Bank.
Accordingly, central bank communication today is actually a monetary policy tool in itself. Communication serves to steer expectations, and the better expectations are steered in line with the monetary policy mandate, the better the central bank will stabilize aggregate demand and therefore price developments, too, as mentioned by German bank president Jens Weidmann.
The important role of policy communication also gets empirical justification. The United States central bank (Fed) in the early days of Janet Yellen’s chairwomanship, for example, used “words” as the main weapon to describe the future policy direction. Later, they had journeyed from “never explain” to a point where sometimes the explanation is the policy.
In conjunction with the emerging best practices of central bank policy communication processes around the world, BI apparently needs to improve its communication patterns.
So when BI revised the bank loan growth target downward, the reserve requirement relaxation policy should not have been exposed.
Likewise, when BI announced the reserve requirement relaxation policy, the revised bank loan growth target downward should not be narrated. The timing of the release of information flows is critical in order to provide an opportunity for all stakeholders to absorb the substance of each message to be conveyed.
The kind of uniqueness principle in communication ensures that the information perceived by the communicator will be relatively the same as the idea introduced by the communicant. Even if there are differences in the absorbed information, to some extent, they can be controlled by the communicant.
Effective communication will strengthen credibility, not only of BI’s policy itself but also the credibility of BI as an institution. A credible policy fosters confidence. Under uncertainty, for instance, the effect of confidence plays a more dominant role and the reaction of economic agents will largely depend on the credibility of the institution.
In such a case, the BI policy that will be pursued in the future has a solid ecosystem construction. The perception and expectations of economic actors who will be affected by BI’s policy at an early stage have been well conditioned. The positive perception and expectations are very fundamental prerequisites in a sustainable monetary or macro prudential policy.
