Quantitative forward guidance through interest rate projections
(March 2022, revised March 2026)
Summary
Focus
Forward guidance on the future path of policy rates has become a key element of central banks' monetary policy toolbox over the past decade. This paper analyses quantitative forward guidance through the publication of interest rate projections, a practice pursued by some inflation targeting central banks.
Contribution
Based on the experiences of the Reserve Bank of New Zealand, the Norges Bank, Sveriges Riksbank and the Federal Reserve, this paper looks at the effectiveness of quantitative forward guidance in terms of their (i) predictability, the extent to which markets are able to anticipate the central bank path; (ii) credibility, the ability of central banks to steer market interest rates through the quantitative guidance provided; (iii) redundancy, whether the central bank interest rate projections provide information beyond that provided through projections of key target variables (eg inflation or the output gap); and (iv) consistency, whether central bank interest rate projections are consistent with the published projections of policy target variables.
Findings
We find that the interest rate projections released by these four central banks are predictable and credible but only in a limited way. Market expectations of the future path of short-term interest rates do anticipate changes in the central bank projection path to a significant degree, yet far from completely. At the same time, market interest rates adjust to path surprises. The adjustment is, however, far from one to one, and weakens as the projection horizon lengthens. We further find that interest rate projections are not redundant in terms of information content. Their impact on market expectations remains significant also when controlling for the effects of central bank macroeconomic projections. Finally, central bank interest rate projections are consistent with central bank macroeconomic projections. The projections are consistent with a widely used rule linking interest rates to inflation and the output gap.
Abstract
We assess quantitative forward guidance provided through interest rate projections published by the Reserve Bank of New Zealand, the Norges Bank, the Swedish Riksbank and the Federal Reserve. We find that the interest rate projections help manage interest rate expectations. Market interest rates partially anticipate changes in the central bank projection path and adjust to path surprises, implying significant but incomplete predictability and credibility of the paths. We further find that the interest rate projections are not informationally redundant to central banks' macroeconomic projections. They impact market rates even when controlling for inflation and real activity projections. Finally, interest rate projections and macroeconomic projections turn out to be consistent with an inflation-stabilizing Taylor rule. The response of policy rates to inflation implied by the projections is significantly larger than one.
JEL classification: E52, E58
Keywords: forward guidance, interest rate projections, central bank communication
