Analysis: Certainty Amid Uncertainty -- Bank of Canada Joins Dual Forward Guidance Club
- Published on
- 30 Oct 2020, 12:50 AM
By Sophia Rodrigues
Bank of Canada has become the latest central bank to provide dual forward guidance on its policy outlook as it aims to provide certainty on interest rates to households and businesses in an environment of uncertainty.
It is not the first central bank to do so and it will certainly not be the last.
In a world filled with uncertainty, use of dual forward guidance is likely to become a norm as central banks put more emphasis on this simple yet highly effective unconventional monetary policy tool to achieve their goals.
“We are providing exceptional forward guidance combined with a full economic projection to provide as much clarity as we can to Canadians in an environment of considerable uncertainty,” Governor Tiff Macklem said in a statement.
The exceptional forward guidance refers to BOC’s commitment to keep policy rate at the effective lower bound until the start of 2023.
“The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our current projection, this does not happen until into 2023”
The inclusion of date based forward guidance is a new step by the BOC and complements its existing outcome-based guidance which was to hold the policy rate until economic slack is absorbed so that the 2% inflation target is sustainably achieved.
RBI AND RBA IN DUAL CLUB
Earlier this month, the Reserve Bank of India introduced a data-based forward guidance saying it will maintain accommodative monetary policy stance at least during the current financial year and into the next year. This was in addition to its event-based guidance that the accommodative stance will be continued as long as necessary to revive growth on a durable basis and mitigate the impact of the COVID-19, while ensuring inflation remains within the target.
The Reserve Bank of Australia is another central bank to have both date-based and event-based forward guidance. Its event-based guidance states that the cash rate target will not be increased until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2% to 3% target band.
The RBA’s date-based guidance is through its target on three-year government bond yield which is a signal to the market that the cash rate will be at the current level for at least three years.
FORWARD GUIDANCE INDISPENSABLE TOOL
An analysis of unconventional monetary policy tools published by the Bank of International Settlements last year said forward guidance played an indispensable role in a period of heightened uncertainty about the economic outlook and the ability of central banks to deal with the challenges especially when rates are at the effective lower bound.
The main aim of forward guidance is to shape private sector expectations about future policy in ways that are different from usual communication styles.
It is clear the BOC is aiming to achieve exactly by providing certainty about borrowing costs to Canadian households and businesses.
“Our primary goal was to provide the clarity to Canadians about what they can expect so they could have more confidence at least in some areas of their finances,” BOC’s Senior Deputy Governor Carolyn Wilkins said.