Note to central banks: keep it simple, stupid
We’ll send you a myFT Daily Digest email rounding up the latest Bank of England news every morning.
Central bankers move markets — and they move them much faster when they use plain English.
That’s the finding of research published on the Bank of England’s staff blog this week by Timothy Munday, an official in its external engagement division, who looked at how long it took prices in swap markets to settle after the central bank published its quarterly monetary policy reports.
Traders have a lot of material to digest when the monetary policy committee puts out these reports — up to 100 pages of dense analysis, once the MPC’s minutes and a transcript of the press conference are added to the report itself. It can take hours or even days for asset prices to catch up.
So it’s no surprise to see that markets settled faster when the central bank managed to summarise its message in the first line of the document — a tactic that also results in more media coverage.
After crunching the data for a decade’s worth of monetary policy reports, Munday found that using well-known words in a predictable way also helped. “Magniloquent” language might sound impressive, but it gets in the way of the message.
Oddly, though, the length of the document and the convolutedness the sentences seem to make no difference.
Central banks are increasingly intent on getting their messaging right. This is the latest in a string of studies aimed at helping them fine-tune communication.
Researchers at Birmingham University found last year that stock markets performed better when the US Federal Reserve chair used an upbeat tone of voice in press conferences; while a recent ECB working paper delved into how its announcements were received on Twitter.
But punchy language isn’t everything — as the BoE governor Andrew Bailey found earlier this week, coming under fire from MPs after he warned of an “apocalyptic” rise in global food prices.
Bailey also used admirably clear English when he said last October that the BoE would “have to act” to curb inflationary pressures — a comment that stoked market expectations of an imminent rate rise, although the MPC then held fire and made its first move to tighten policy only in December.
Contrast too the effects of Mario Draghi’s promise to do “whatever it takes” to save the euro, with the sell-off that followed Christine Lagarde’s equally clear, but misjudged, remark in 2020 that it was not the ECB’s role to close spreads in bond markets.
As Munday warns, substance still matters more than style. “One could argue that if the Bank of England has a more complicated message to convey, it must write in a more complicated style” — even if it means a sentence “that has dependency arcs that are longer that make it more difficult to read”.