Why foresight needs to be guided
In the years leading up to the financial crisis, central banks around the world were given additional tools to help maintain the stability of the financial system.
Among these was forward guidance – a new communication tool to help central banks communicate with the market and the public on economic prospects and future political plans.
In the last episode of CB-on-Air’s Partners in the spotlight series, Richard Barwell explains why current forward-looking frameworks are limited in scope.
Barwell argues that forward guidance as a tool should be redundant, arguably “unnecessary,” because markets and investors have access to the same information as central banks and know how they react to that information.
“In practice, we can see that the messages delivered by central banks are moving the markets,” he says. “It sounds like intervention and sometimes you worry that it looks like selective disclosure of information to move markets.”
Barwell argues that current forward-looking guidance frameworks are incomplete: central banks tell markets what they’re thinking about, what they’re doing, and what might happen, but there isn’t enough information on why.
If changes are not made, central banks risk ceding control of monetary stance to the markets, which will guess what the central bank will do next. “You have to complete the orientation in advance,” says Barwell. “It means full disclosure of the political debate. “
But there are structural factors in place that will make the evolution of forward-looking frameworks a challenge, the structuring of political committees is one example.
“We go from a Mario Draghi to a Christine Lagarde; you have constant turnover and that makes promises made by one person even more questionable, ”says Barwell.
00:55 A form of intervention?
02:30 Long-standing credibility issues
04:40 Long-term rate control
08:00 Make orientation more efficient
10h60 Orientation of the review of the ECB’s strategy
Richard Barwell is head of macro research at BNP Paribas Asset Management. He is responsible for coordinating investment views across all asset classes and covers developments in macro markets in Europe.