Policy and Macro Signals from Central Bank Announcements

How do private agents understand central bank actions and communication? This paper investigates private agents' interpretation of central bank signals about future policy and the macroeconomic outlook that are conveyed by both policy decisions and macroeconomic communication. Using U.K. data, we assess the effects of these two types of central bank announcements on inflation swaps and stock returns at daily and monthly frequencies. We find that policy decisions convey signals about the macroeconomic outlook at the daily frequency, but that policy signals dominate at the monthly frequency such that asset prices respond negatively to contractionary policy, consistent with the usual transmission mechanism. We also find that inflation expectations respond positively to the Bank of England's macroeconomic information surprises, consistent with agents taking a signal about the economic outlook.