An analysis of decisions from Group of 20 central banks since 2010 found that the Federal Reserve surprised the least, while major emerging market central banks are on the opposite side of the spectrum.
“The transparency revolution in central banking has all but eliminated surprises from Federal Reserve, European Central Bank and Bank of England decisions," Bloomberg economists led by Tom Orlik wrote. “In emerging markets though, it’s a different story, with central banks retaining their power to surprise."
Part of the shock effect is linked to opaqueness among emerging economy central banks compared with their developed peers. Ranked against five criteria, the Fed, Bank of England and Bank of Japan came out as the most transparent, while the PBOC surprises more.
A case in point was this week’s surprise decision by China to cut the reserve-requirement ratio for some banks, fuelling a rally in the bond market. When China unexpectedly devalued the yuan in August 2015, the move fuelled capital outflows and sent shock waves through global markets.
“For the PBOC, as there are no scheduled meetings, we classify surprises as decisions that were not anticipated by the market at the start of the quarter," according to Orlik. “That might result in slightly overstating the number of surprises, as the market view might move between the start of the quarter and the time of the decision."
Changes in personnel running the central bank are normally another source of surprise.
“Unsurprisingly, central banks tend to surprise more around leadership changes and shifts in policy direction," according to the analysis. “As 2018 is an important year for both, the chances of surprises appear somewhat elevated."
Clear signalling to the market means the Fed, Bank of England, Bank of Canada, and ECB were the least surprising of the G-20 central banks, with unexpected decisions, on average, at just 3% since 2010.
China, Russia, India and Brazil surprised the most, at an average of 25% of the time.
To assess the transparency of a central bank, Bloomberg Economics looked at five criteria: whether the bank has scheduled policy meetings, published minutes of the meeting, a post-decision press conference, off-record briefings for journalists, and speeches by policy makers.
On these metrics, the PBOC and Saudi Arabia’s central bank are the least transparent.
The Bloomberg Economics analysis defines surprise policy decisions as those that deviate from the median forecast in Bloomberg surveys. Inter-meeting decisions are also considered surprises and for those central banks that do not hold regularly scheduled meetings, like the PBOC, the assumption is that they meet quarterly, according to Orlik.
“There are exceptions to the rule," the economists wrote in the report. “The Bank of Japan scores a perfect five-out-of-five on transparency, but still surprises quite a lot. That may be because BOJ policy makers use surprise to maximize the impact of the very limited tools at their disposal."
Shifts in policy are the biggest source of surprises. The central banks of Brazil, Russia, India, China and South Africa have on average had 1.7 surprises per year since 2010 and 2.5 surprises in years of policy change.
“That’s something to keep in mind in 2018, as banks from the ECB to the BOJ mull a shift away from extreme easing," according to the report.
Leadership changes also spur surprises as new leaders tend to be more unpredictable than established ones.
“So far in 2018, Chairman Jerome Powell’s tenure at the Fed has been incident free," according to Bloomberg Economics. “We’ll see if that continues, and if the same will hold for the joint team of governor Yi Gang and party secretary Guo Shuqing at the PBOC." Bloomberg