ECB can claim one early victory for forward guidance

September 17, 2013

The European Central Bank can claim at least one early victory for forward guidance: forecasters have been persuaded by its promise to keep key interest rates low or lower for a long time.

While ECB officials have struggled to talk down rising money market rates that point to an undesirable early tightening of monetary policy, they have had more luck influencing market economists in Reuters polls.

That’s significant because both euro zone central banks and the Bank of England use Reuters polls as a measure of interest rate expectations.

A comparison of the same 43 respondents who took part in two Reuters polls – one taken just before the ECB adopted forward guidance in July, and one before this month’s meeting – shows how the new policy has swayed economists. (see chart – click to enlarge)

The consensus that the main refinancing rate will stay on hold until at least 2015 has firmed since forward guidance.

It’s still open to debate what the ECB means when it says key interest rates will stay at present or lower levels “for an extended period of time”, but if that’s until at least 2015, then it’s clear most forecasters believe it.

The Bank of England too has had some success in pushing back expectations for the next interest rate hike, although perhaps not as much as it would like.

Of the 28 economists who gave forecasts just before August’s launch of forward guidance, and then for the September meeting, 16 had pushed back their expectations after the announcement.

Still, the majority still pencil in a rate hike well in advance of the BoE’s plan to keep rates on hold until unemployment drops to 7 percent, which it thinks will happen in the third quarter of 2016.

From the full sample of analysts polled before this month’s MPC meeting, three-quarters said rates will rise before Q3 2016.

But pitted against economic indicators that have pointed to surprisingly strong growth for the UK economy, it might be counted as a success for the BoE that it’s managed to push back forecasts for rate hikes even slightly.

* Updated with analysis from BoE polls

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