Definition of forward guidance
Forward guidance involves central banks pledging to keep interest rates very low for a specified period, which is usually contingent on inflation remaining relatively low. The idea behind such guidance is that, by convincing people that loans will remain cheap and savings rates low, they will go out and spend more today.
forward guidance in the news
Mark Carney, the Bank of England governor, faced dissent from within the Monetary Policy Committee (MPC) when he announced his forward guidance policy - his big idea to improve the UK economy.
It would be one of the most substantial changes to the UK’s monetary policy framework since the rate-setting Monetary Policy Committee became independent in 1997.
Since the guidance framework was unveiled in early August in 2013, markets have questioned the BoE’s intent to keep rates at rock bottom until unemployment falls from its current level of 7.8 per cent to below 7 per cent, which the MPC does not expect for another three years.
Mr Carney was the first central bank governor in the G7 to introduce forward guidance, in April 2009 committing to keep Canadian interest rates ultra low until the middle of the following year. The US Federal Reserve later followed the Bank of Canada’s lead and then went a step further by linking its pledge to keep rates low to a fall in unemployment.