Changes in monetary policy stance affect expectations of the public concerning inflation, employment, growth, future income and profits/losses.  Such changes in expectations in turn determine private economic activities.  However, the impact of monetary policy through this channel is the most uncertain of all channels, as it depends on the public’s interpretation of such changes in monetary policy stance.  For example, the public may view a decrease in the policy rate as a signal that the economy is going to expand higher in the future, boosting their confidence to consume and invest.  On the other hand, they may believe that the economy is weaker than previously expected, lowering their confidence and ultimately consumption and investment.

Inflation forecasts help guide inflation expectations which are important determinants of wage increases and actual inflation in each year as well as long-term interest rates.  Thus, inflation targeting countries are committed to anchoring inflation expectations of the public through the announcement of an inflation target.