By David Barwick – FRANKFURT (Econostream) – European Central Bank communication can directly influence household inflation expectations and thus forms part of monetary policy transmission, but credibility ultimately depends on the central bank delivering on its mandate, ECB Vice-President Boris Vujčić said Tuesday.
“Since expectations affect transmission, communication is not an afterthought. It is part of policy transmission itself,” Vujčić said in a speech at the European School of Management and Technology in Berlin.
But communication alone could not sustain credibility, he said.
“Communication cannot replace a central bank’s performance,” Vujčić said. “Trust is gained through competence, consistency, transparency and accountability.” In the end, he added, “credibility depends on what we do, and whether it matches what we say.”
Vujčić said household expectations were important for monetary policy because expectations about inflation, income, employment, interest rates and house prices influenced spending, saving, borrowing and wage demands, and thus helped shape the transmission mechanism.
Such information had become particularly valuable amid elevated uncertainty and geopolitical tensions, he said, noting evidence that geopolitical risk could significantly worsen euro area household sentiment and spending intentions.
Geopolitical shocks affecting energy prices and the broader cost of living could result in “weaker confidence, higher inflation expectations and greater economic uncertainty,” Vujčić said, while increased perceived macroeconomic uncertainty could persistently depress household spending.
Household inflation expectations were generally less well anchored than those of professional forecasters, he said. However, longer term household expectations tended to be more centered around the ECB’s 2% target and less sensitive to surprises than shorter term expectations, helping policymakers distinguish temporary inflation episodes from more serious credibility risks.
Vujčić said households formed expectations differently from professional forecasters, with selective attention, incomplete information and widely dispersed beliefs reflecting differences in income, wealth, housing, financial literacy, experience and trust in institutions.
Salient prices, particularly food and fuel, could disproportionately influence households’ perceptions and expectations of inflation, he said.
This heterogeneity also mattered for monetary policy transmission, Vujčić said. The impact of monetary tightening differed according to housing tenure, stock market participation, mortgage type and the timing of interest rate resets, while mortgage repricing affected consumption with long and uneven lags across household groups and countries.
On communication, Vujčić said research suggested that simple explanations of a central bank’s target and objective could be more effective with broad audiences than explanations focused on technical policy instruments. Clear communication about the inflation target could also improve perceived central bank credibility, including among people with lower financial literacy.
The communication challenge varied with the inflation environment, he said. When inflation was low, households tended to pay little attention, making them harder to reach. When inflation was high, they paid greater attention to prices, but this also made it more difficult for central banks to provide genuinely new information.
Periods of high inflation nevertheless offered “a window of opportunity” to explain how the central bank was responding, what monetary policy could achieve and why price stability remained its focus, Vujčić said.
“In such circumstances, communication should be clear, accessible and candid about uncertainty,” he said.