Central bank communication affects the term-structure of interest rates

We empirically analyze how the Brazilian Central Bank (BCB) communication affects the term structure of future interest rates. Using principal components analysis, we construct a measure of the Monetary Policy Committee Minutes content that reflects policy makers optimism about the economic conditions. We call this measure the Optimism Factor (OF). When policy makers are more optimistic, reflected by increments in the OF, markets expectations respond and long-term future interest rates drop. Furthermore, when policy makers are pessimistic, reflected by a decrease in the OF, volatility on future interest rates increases. Our result indicates that policy maker communication has an effective impact on market expectations.