MacroScope

ECB can claim one early victory for forward guidance

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.

Has dawn broken over Britain’s economy?

Bank of England Governor Mark Carney said on Thursday he was wary of another “false dawn” for Britain’s economy, but economists polled by Reuters are generally more optimistic.

The poll, published on Wednesday and taken ahead of an unexpected fall in unemployment, said the economy would expand a relatively healthy 0.7 percent in the current three month period and then by 0.5 percent per quarter through to early 2015.

And that comes after better than expected 0.7 percent growth in the second quarter.

Recalculating: Central bank roadmaps leave markets lost

Central banks in Europe have followed in the Federal Reserve’s footsteps by adopting “forward guidance” in a break with traditionBut, as in the Fed’s case, the increased transparency seems to have only made investors more confused.

The latest instance came as something of an embarrassment for Mark Carney, the Bank of England’s new superstar chief from Canada and a former Goldman Sachs banker. The BoE shifted away from past practice saying it planned to keep interest rates at a record low until unemployment falls to 7 percent or below, which it said could take three years.

Yet the forward guidance announcement went down with a whimper. Indeed, investors brought forward expectations for when rates would rise – the opposite of what the central bank was hoping for – although the move faded later in the day.