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Business Maverick: ECB Hike Showcases the Death of Central Banks’ Forward Guidance

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The European Central Bank’s decision Thursday to raise interest rates by double the amount that top policy makers had signaled showcases the end of a tool that monetary chiefs have relied on for more than a decade now: forward guidance.

ECB President Christine Lagarde herself declared the death of the practice — at least for now — in a press conference Thursday after she and her colleagues boosted rates by 50 basis points, despite having prepared observers for only 25.The communication tool was already being questioned after the Federal Reserve lifted its benchmark rate by 75 basis points in June, despite Chair Jerome Powell having previously appeared to rule out such a hike.

Specific forward guidance on monetary settings was championed more than a decade ago by Mark Carney and his colleagues at the Bank of Canada, when the then-governor was searching for added stimulus tools. The ECB move came as a surprise to the vast majority of economists who had predicted a quarter percentage-point move, and to investors who were pricing in that same amount before the decision.

 

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