We analyze how Brazilian financial markets, in particular futures interest rates, react to monetary policy both in terms of deeds, i.e. changes in the policy rate, and words, i.e. central bank communication. Using daily data from 2005 to 2014, we find that the futures interest rates react in the expected direction to both the central bank’s actions and words, namely futures rates do increase (decrease) after both an increase in the reference interest rate and a hawkish (dovish) communication by the Banco Central do Brasil (BCB).
We also find that BCB words create more “noise”, since they generate an increased volatility of futures rates. Our analysis also reveals that monetary policy communication has increased its effectiveness – measured by its larger impact on future rates and a reduced volatility- after the 2008 international crisis. At the same time, the deeds became less relevant as the effect of the changes in the SELIC rate on future rates has declined since then.