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  • Writer's pictureWilliam Webster

Forward Guidance

Forecasting is a major pastime in financial markets. Economic indicators are pre-estimated. Company results are projected. Macro indicators are anticipated. This has huge entertainment value and when the outcome is unexpected prices change.

But can forecasting affect the future? Some central bankers think it can. But to think like this you need to be an elephant. Let’s put it in perspective.

If you are told interest rates will remain low for years to come will you borrow and spend more? Your action will probably depend on whether this is a fact or a prediction.

Does your view change when you realise this is not the analyst speaking, it’s the elephant? And the elephant can stay in the room for a very long time?

For elephants this is both an exciting and dangerous game. Objectives can be achieved with little more than well-chosen words. But the room for error is limited and the cost can be high.

If things go wrong and ratings, Sterling and Gilts fall there is a real effect and monetary policy must alter. But the elephant can’t move without damaging trust.

Perhaps therefore it is better to stay with the old method. That is to indicate where you stand on inflation but to side step when you feel it is appropriate.

This too can damage credibility but at least it’s consistent. After all it’s how the UK has always dealt with excessive post war leverage.

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