Central Bank Communication and Interest Rates: The Case of the Czech National Bank

We examine how written and oral central bank communications affect the level and volatility of interest rates. We use detailed daily data on the Czech central bank's communication in 2007-2012. We find that financial markets respond to central bank communication. Short-term interest rates rise if the bank communicates that economic conditions are good. The results suggest that written communication, but not oral communication, decreases the volatility of both short-term and long-term interest rates. The timing of communication has a key role, as comments made closer to the monetary policy meeting have a bigger calming effect on the markets. All in all, our results point to the importance of well-designed communication for reducing noise in the financial markets.