IMF Seeks Changes to Central Bank Policy Signals

The International Monetary Fund (IMF) plans to hold talks with central banks in the coming months on changes in the use of so-called forward guidance, or central bank signals about the future direction of interest rates and monetary policy.

Petya Koeva Brooks, deputy director of the IMF’s Research Department, said the tool had proved useful in the past. However, given the current economic uncertainty and volatility, she added that it was natural to reassess how and when it should be used.

Brooks nevertheless stressed the importance of clear communication to help markets understand how central banks will respond to unexpected economic shocks.

The discussions follow changes introduced by new US Federal Reserve Chairman Kevin Warsh, who took office in May. Warsh has pushed to simplify policy statements by removing references to possible near-term interest rate moves. Speaking at an economic forum in Sintra, Portugal, he said policy decisions should be based solely on current economic conditions.

The heads of the European Central Bank, the Bank of England and the Bank of Canada also expressed reservations about forward guidance.

Former IMF chief economist Pierre-Olivier Gourinchas likewise argued before leaving the fund in June that central banks should move away from strong forms of forward guidance because it had previously committed central banks to future actions regardless of economic developments.

(Reuters, Max)