The buzzword for the latest set of interest rate decisions is forward guidance, which refers to the public disclosure of interest rate forecasts and monetary plans by central bank officials.
In this week's Bank of England monetary policy statement, new BOE Governor Mark Carney stated that the markets shouldn't expect an interest rate hike until the middle of 2015. Meanwhile, European Central Bank Chairman Mario Draghi said that interest rates in the euro zone will remain low for an extended period.
The US Federal Reserve has been practicing this kind of communication strategy for quite some time already. Recall that Fed Chairman Bernanke has been saying that interest rates will kept at their record lows for an extended period time back when the US economy needed stimulus to recover from the recession. Recently, Bernanke continues to communicate the central bank's plans to the markets by saying that the open-ended asset purchase program will be tapered by the end of the year and possibly ended by the middle of next year.
From the policymakers perspective, there are two main benefits that can be derived from this communication strategy. One is that it will allow them to calm the volatility in the bond markets, allowing them to keep bond yields from spiking whenever speculators think that interest rates are about to increase or decrease. This allows them to keep borrowing costs more stable, as markets already have an idea of how interest rates will be in the longer run. Next is that it enables policymakers to maximize their current monetary policy. After all, most major central banks have already slashed benchmark rates to record lows, pushing their backs against the wall when it comes to looking for more easing options. If they announce that rates will remain low for the next few years, they are able to convince banks and lenders to keep lending rates lower for much longer without actually having to cut benchmark rates or implement more asset purchases.
As a result, market watchers are now more aware of which central banks are dovish and which ones aren't. In particular, the BOE and ECB have just emerged as very dovish central banks in comparison to the Fed, which is looking to reduce stimulus soon. With that, forex traders could spot cleaner trends on GBP/USD and EUR/USD.
In this week's Bank of England monetary policy statement, new BOE Governor Mark Carney stated that the markets shouldn't expect an interest rate hike until the middle of 2015. Meanwhile, European Central Bank Chairman Mario Draghi said that interest rates in the euro zone will remain low for an extended period.
The US Federal Reserve has been practicing this kind of communication strategy for quite some time already. Recall that Fed Chairman Bernanke has been saying that interest rates will kept at their record lows for an extended period time back when the US economy needed stimulus to recover from the recession. Recently, Bernanke continues to communicate the central bank's plans to the markets by saying that the open-ended asset purchase program will be tapered by the end of the year and possibly ended by the middle of next year.
From the policymakers perspective, there are two main benefits that can be derived from this communication strategy. One is that it will allow them to calm the volatility in the bond markets, allowing them to keep bond yields from spiking whenever speculators think that interest rates are about to increase or decrease. This allows them to keep borrowing costs more stable, as markets already have an idea of how interest rates will be in the longer run. Next is that it enables policymakers to maximize their current monetary policy. After all, most major central banks have already slashed benchmark rates to record lows, pushing their backs against the wall when it comes to looking for more easing options. If they announce that rates will remain low for the next few years, they are able to convince banks and lenders to keep lending rates lower for much longer without actually having to cut benchmark rates or implement more asset purchases.
As a result, market watchers are now more aware of which central banks are dovish and which ones aren't. In particular, the BOE and ECB have just emerged as very dovish central banks in comparison to the Fed, which is looking to reduce stimulus soon. With that, forex traders could spot cleaner trends on GBP/USD and EUR/USD.
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