Forward guidance could become trap for central banks: Economist
TOKYO: Central banks risk being late in arresting inflation if they rely too much on forward guidance - a tool used to communicate the future path of monetary policy, a widely respected economist told policymakers at a Bank of Japan-hosted event on Wednesday .
But by incentivising central banks to commit to keep rates low for long, forward guidance becomes a constraint when they need to swiftly tighten policy to rein in inflation, he said. The US Federal Reserve and the European Central Bank, but not the Bank of Japan, ended up being behind the curve in addressing rising inflation with interest rate hikes, he said.
BOJ Governor Kazuo Ueda, who was present at the conference, said the very nature of forward guidance meant central banks took the risk of falling behind the curve whenever they were using the tool.
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