Central banks in Europe have followed in the Federal Reserve’s footsteps by adopting “forward guidance” in a break with tradition. But, 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.
According to a money market trader:
The focus on… unemployment level in the UK at 7 percent, something which we have never really looked at before, has given us the possibility of just more volatility going forward. So rather than having a calming effect, the forward guidance from the UK and (BoE governor Mark) Carney has actually had the reverse effect, it’s created some uncertainty and volatility…
It’s just that the target set on the unemployment rate is quite close to where we currently are… had he set a slightly lower target then the market probably would have been a bit more comfortable with some forward guidance in that respect.