Defending forward rate guidance

The Reserve Bank of New Zealand has published a neat summary of arguments in favour of revealing a forward projection for a central bank's key interest rate.

The RZNB, one of the most transparent central banks in the world, is very open about its monetary policy outlook. Its forward-looking communications include the publication of a forward projection for the 90-day interest rate, comments on the outlook for policy, discussion of risks in its monetary policy report and the presentation of alternative scenarios.

John McDermott, Assistant Governor and Head of Economics at the RBNZ, said in a speech that the publication of the interest rate projection can improve the effectiveness of monetary policy in a number of ways.

Since 1997, the RBNZ has been one of only a handful of central banks that publish forecasts for the short-term interest rate. Among the others are Riksbank and the Czech National Bank, both also among the most transparent central banks globally.

The 90-day interest rate projection, based on a range of assumptions, provides a guide of what monetary policy settings may be needed to return or keep inflation at target. We feel that this is a more informative approach than assuming a constant or market path for interest rates - which may present an interest rate path that is inconsistent with the Bank’s price stability mandate.