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The end of forward guidance?

Central banks are moving away from forward guidance. What does this mean for markets?
The end of forward guidance?
  • Central banks are becoming less predictable as they move away from forward guidance
  • This means that markets may become more sensitive to economic data releases

The Fed describes forward guidance as a ‘tool that central banks use to provide communication to the public about the likely course of monetary policy’. The Bank of England takes an even more straightforward approach: in March, Deputy Governor Ben Broadbent explained it in similarly prosaic fashion as ‘statements by monetary authorities about future policy’. 

By providing an indication of the future path of policy, forward guidance can impact current spending and investment decisions. And it was a particularly useful tool in a low-rate environment: when central banks are operating at the ‘zero lower bound’, they can’t cut rates further (barring an experiment with negative interest rates). They therefore need to seek out more innovative policy tools. Forward guidance can also inform markets that interest rates will stay low for longer than market pricing implies. This provides an additional economic stimulus and should, in theory, reduce both uncertainty and interest rate volatility. 

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