- Market intelligence suggest rate expectations 25 bps lower two years ahead than without forward guidance
- LIBOR options show forward guidance has reduced uncertainty about next 3-6 months, has a small effect on economy
- Pushing rate rise expectations back by one year could boost GDP by up to 0.75% and inflation by 0.25%
- Public’s partial understanding of forward guidance may significantly limit effects on economy
There’s still plenty of arguments for and against forward guidance and my view is that a leopard can’t change it’s spots. Markets react to what an economy does. If it expands and inflation rises then it looks for rate rises and vice versa. I don’t think the market will give a second glance to forward guidance if the central bank targets thresholds start getting hit.
