Central banks are often described as institutions that set interest rates. That is true, but incomplete. A central bank also manages expectations.

Inflation expectations are what households, businesses and investors believe inflation will be in the future. If people expect prices to rise quickly, they may change behavior today. Workers may demand higher wages. Businesses may raise prices earlier. Consumers may buy goods sooner. Investors may demand higher returns. These reactions can make inflation more persistent.

This is why credibility matters. A credible central bank can influence expectations because people believe it will act to control inflation. If credibility is weak, even high interest rates may not convince the public that inflation will fall.

Kazakhstan’s monetary policy shows why this matters. The National Bank of Kazakhstan maintained a base rate of 18.0% in April 2026 while annual inflation remained above target. A high rate signals that the central bank is serious about price stability. But the effect depends not only on the rate itself. It also depends on whether households and firms believe inflation will actually decline.

Expectations are shaped by many factors:

  • past inflation;
  • exchange rate movements;
  • food and fuel prices;
  • tax changes;
  • government spending;
  • communication from policymakers;
  • wage growth;
  • credibility of institutions.

If people repeatedly see prices rising faster than forecasts, trust weakens. If policy is predictable and inflation gradually falls, trust improves.

For financial markets, expectations are crucial. Bond yields reflect expected inflation and interest rates. Currency markets react to credibility. Stock markets react to future growth and financing costs. Banks adjust lending rates based on policy expectations.

In a simulation, central bank credibility can be a powerful indicator. If a player keeps changing policy unpredictably, credibility should fall. If they communicate clearly and act consistently, credibility should rise. Higher credibility should make inflation easier to control. Lower credibility should make every policy decision more expensive.

For example, if inflation is high and credibility is low, raising interest rates may not immediately calm expectations. Markets may think the central bank will reverse course. If credibility is high, a smaller rate increase may have a stronger effect because people believe the policy will continue.

This teaches an advanced lesson: financial systems run on trust. Money has value partly because people trust institutions. Bonds are bought because investors trust repayment. Bank deposits are stable because people trust banks. Monetary policy works best when people trust the central bank.

The key lesson: central banking is not only about rates. It is about credibility, communication and confidence.