If human history teaches us anything it is that you cannot predict the future, the best you can do is project the present forward a little: it’s raining, the skies are leaden; it’ll probably rain a while longer – that sort of thing. However, many decisions in life must be made based on our best guess as to what is likely to happen in the future. For example, do you move your family to a new town (or country!) to take up what looks like a fabulous job offer? Many business decisions are also based on what the company thinks will be happening down the line in a few months or even years, so a potential future shapes decisions taken now.
Providing “end users” with what central banks think is likely to be happening with the economy and marcoeconomic policy is known as “Forward Guidance”. Forward Guidance from the Bank of England suggested that interest rates would start to increase gradually this year, indeed, the upwards direction of the interest rate was heralded back in 2014 and is yet to come to pass. Most analysts expect them to remain unchanged until the end of next year. What is within the Bank’s control (largely!) is the timing of the rise and its magnitude. Forward Guidance has it that the return to traditional interest rate values will be a long and gentle process.
As the Governor of the Bank of England, Mark Carney put it: “Did I know that oil was going to fall 12 per cent in the last 10 days? No, I didn’t know that.
The Chinese hadn’t given me 12 months heads up that they were going to come off the (Yuan) peg. I didn’t realise that, either. But I will continue to try to frame as accurately as possible what’s guiding my decision process.”
So it appears that forward guidance is more along the lines of “you will meet a tall, dark stranger…” rather than an airline flight schedule for next month. However, much as you can make certain predictions with certainty, such as the sun will continue to rise in the morning, interest rates will rise above their current, historic low levels “soon” – but then soon is a moveable feast too!