Central bankers, who once considered obscurity central to their craft, are trying to wean the world from the predictability they've nurtured over 15 years of concrete guidance about their intentions and return to a time when policy starts, stops and occasional surprises were more the norm.
The endeavor is driven by recognition that renewed inflation may require higher and more frequently changed interest rates than has been the case since 2007, when a U.S. financial crisis opened an era of strong and often detailed central bank guidance that spanned the near crack-up of the euro zone, sluggish growth, an oil slump, pandemic and war.
The Reserve Bank of Australia and the Bank of Canada showed the emerging model last week when, with little to no advance effort to steer public expectations, they resumed rate increases after inflation proved more persistent than anticipated. Both had held rates steady since earlier in the year. The European Central Bank says it has adopted a "meeting-by-meeting" approach with "a strong preference against returning to outright forward guidance on policy rates." But as a practical matter officials have provided such a strong steer - a "directional bias" they call it - that markets have put nearly a 100% probability on a rate increase at the June 15 meeting. A long list of individual policymakers have said rates should rise in July, too.
"Walking the optionality tightrope won't be easy," said EY-Parthenon Chief Economist Gregory Daco. "There is some element of cognitive dissonance in waiting...to tighten policy if it's necessary today."
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