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Inflation targeting (IT) had originally been introduced as a device to bring inflation down and stabilize it at low levels. Given the current environment of persistently weak inflation in many advanced economies, IT central banks must now bring inflation up to target. This paper tests to what extent inflation expectations are anchored in such circumstances, by comparing across periods when inflation is around target, (persistently) high, or (persistently) weak. It finds that under persistently low inflation, inflation expectations are not as well anchored as when inflation is around target: inflation expectations are more dependent on lagged inflation; forecasters tend to disagree more; and inflation expectations get revised down in response to lower-than-expected inflation, but do not respond to higher-than-expected inflation. This suggests that central banks should expect inflation expectations to behave differently than was the case previously, when inflation was often remarkably close to target in many advanced economies.

How do financial markets incorporate news? This paper argues that one piece of news not only has direct effects on asset prices and market volatility, but it can also alter the relative importance of other news. Studying the reaction of UK short-term interest rates to the Bank of England’s Inflation Report and to macroeconomic announcements, this paper finds support for the notion of interdependent news effects. With time elapsing since the latest release of an Inflation Report, market volatility increases, suggesting that market uncertainty rises until the central bank updates its communication. At the same time, the price response to other macroeconomic announcements becomes more pronounced, and they play a more important role in reducing uncertainty.

The question how best to communicate monetary policy decisions remains a highly topical issue among central banks. Focusing on the experience of the European Central Bank, this paper studies how explanations of monetary policy decisions at press conferences are perceived by financial markets. The empirical findings show that ECB press conferences provide substantial additional information to financial markets beyond that contained in the monetary policy decisions, and that the information content is closely linked to the characteristics of the decisions. Press conferences indeed have on average had larger effects on financial markets than even the corresponding policy decisions, and with lower effects on volatility. Moreover, the Q&A part of the press conference fulfils a clarification role about the economic outlook, in particular during periods of large macroeconomic uncertainty. JEL Classification: E52, E58, G14