In the years that preceded the financial crisis, central banks around the world were given additional tools to help maintain the stability of the financial system.
Among them was forward guidance – a new communication tool to help central banks communicate to the market and the public about the economic outlook and future policy plans.
In the latest episode of CB-on-Air’s Partners in Focus series, Richard Barwell discusses why current forward guidance frameworks are limiting in scope.
Barwell argues that forward guidance as a tool should be redundant, arguably “pointless”, as markets and investors have access to the same information central banks do, and know how they react to said information.
“In practice, we can see messages central banks deliver do move markets,” he says. “This sounds like an intervention and sometimes you worry it sounds like a selective disclosure of information to move markets.”
Barwell argues that current forward guidance frameworks are incomplete: central banks tell markets what they are thinking about, what they’re doing and what might happen, but there is not enough information on the why.
If changes are not made, central banks may risk handing over control of the monetary stance to markets that will guess what the central bank will do next. “You need to make forward guidance complete,” Barwell says. “This means full disclosure on the policy debate.”
But there are structural factors in place which will make changing forward guidance frameworks a challenge, the structuring of policy committees being one example.
“You go from a Mario Draghi to a Christine Lagarde; you’re having constant turnover and that makes the promises made by one individual even more questionable,” Barwell says.
00:55 A form of intervention?
02:30 Long-standing credibility issues
04:40 Controlling longer-term rates
08:00 Making guidance more effective
10:60 ECB strategy review guidance
Richard Barwell is the head of macro research at BNP Paribas Asset Management. He is responsible for co-ordinating investment views across all asset classess and provides coverage of macro market developments in Europe.