The Sentiment of Reserve Bank of New Zealand Monetary Policy Media Releases and the Impact on Financial Markets

Abstract

Central banks play a critical role in shaping financial markets through their monetary policy decisions. As part of their commitment to transparency, they provide forward guidance through, for example, soft information such as Official Cash Rate announcements, which convey the tone and sentiment of the announcement. Tone and sentiment influence market participants' expectations and, in turn, market behaviour. Therefore, understanding how sentiment impacts financial indicators is vital for both policymakers and investors. This study investigates whether the sentiment of the Reserve Bank of New Zealand’s Monetary Policy (MP) media releases influences financial markets, specifically the stock market and exchange rate. Sentiment analysis is performed using three methods: the Valence Aware Dictionary for sEntiment Reasoner (VADER) and two bag-of-words lexicons—Loughran-McDonald (LM) and Hu and Liu (HL). Sentiment variables are incorporated into an event-study framework using OLS regression analysis to identify associations between sentiment and financial outcomes. The results showed that VADER slightly outperforms LM and HL. Results from the event study suggest that a marginally negative association exists between the VADER negative score and the New Zealand stock market adjusted for the US stock market. Therefore, a higher proportion of negative sentiment in an MP media release could negatively impact the New Zealand stock market. Similarly, there was a stronger negative association between the VADER positive score and the trade-weighted index, indicating that an increase in the proportion of positive sentiment in an MP media release depreciates the New Zealand exchange rate. This indicates that positive sentiment might lead to increased domestic confidence and spending, potentially raising imports. This contribution provides valuable insights into central bank communication strategies in small, open economies.