Forward guidance

Communication used deliberately to affect the expected path of rates rather than their current level. It appears in the statement, in the press conference, in projections and in speeches, and most committees treat it as a tool of the same standing as the rate itself. The reason is mechanical: borrowing and lending across an economy is priced off expectations of the whole path, so a credible statement about the coming year can tighten or loosen conditions without any rate changing today.

Guidance is conditional on a forecast rather than a promise about a rate, and committees say so explicitly. It comes in recognisable forms: qualitative language about the likely direction, a condition tied to a date, and a condition tied to a state of the economy such as an inflation or unemployment threshold. The state contingent form is the strongest, because it tells a market what would have to change for the guidance to change.

Its weakness is the same as its strength. Guidance that is followed becomes credible and therefore powerful; guidance abandoned when conditions change costs credibility that later statements need, and a committee that has been surprised faces a choice between two bad options. That tension is why the language is hedged, why an apparently minor wording change can move a currency, and why central banks differ so widely in how much of a path they are willing to publish.