Uncertainty, data dependence and interest rate volatility

We study how central bank communication about the uncertainty surrounding its assessment of macroeconomic developments shapes financial market reactions to economic news. Using euro-area evidence, we show that when markets perceive the central bank to be operating in a "high-learning" regime - marked by high uncertainty and repeated forecast errors - the pass-through of inflation surprises to interest rates is amplified, resulting in greater volatility. To interpret these findings, we develop a model of imperfect information in which the private sector updates its beliefs about the persistent component of inflation using both realized inflation and the central bank's projections. In this setting, the central bank's projections are viewed act as noisy signals, and their perceived precision determines how much weight the private sector places on the central bank's macroeconomic assessment relative to incoming data. The model predicts that when projections are viewed as more precise, expectations become more anchored and interest rates respond less to news. Overall, the empirical and theoretical results highlight that communicating the confidence surrounding central bank projections is not a neutral act of transparency but an active policy instrument.