The Beginning of the End of Forward Guidance
(Bloomberg Opinion) -- Consistency in central banking is usually a virtue. But Brazil is proving that it’s not the highest virtue.
One of the big features of monetary policy in the post-2008 era has been an increase in transparency among central banks, which were too secretive in the bad old days. Key to this transparency has been forward guidance, a clear telegraphing of intentions on interest rates. It was understood that officials would do what they say they would do or, if they are going to change course, they would explain why with equal transparency. That’s no longer a safe assumption.
Brazil bucked its own guidance this week and opted not to cut rates. The central bank had reduced borrowing costs a dozen times, a rarity for Brazil, because inflation was safely below target. That meant the governor, Ilan Goldfajn, was free to stimulate an anemic economy.
The change of heart reflects the woes of neighboring Argentina, which have tainted emerging markets generally, and some deviation from the narrative of “synchronized global growth.” Between the meeting when the central bank telegraphed rate cuts and the meeting where it did not cut rates, Brazil's currency, the real, had been hammered. The real did weaken some more, along with many emerging-market currencies, though the decline would surely have been steeper had the governor pressed ahead with a cut.
Goldfajn, who has a deep reservoir of goodwill among investors, had a choice: keep doing what he said he was going to do and risk an error, or renege for a better policy outcome. He went with the latter, probably wisely.
It can't have been easy for Goldfajn. His whole game since he took the helm two years ago was to make the BCB credible. Back then, the idea was that Brazilian economic policy and, government in general, needed a fresh start. Dilma Rousseff had just been impeached and removed from the presidency. Her successor plucked Goldfajn from Itau Unibanco SA, the country's largest private lender, where he was chief economist. The economy needed a firm, reliable hand.
Aside from a consistent message -- cutting rates because inflation was low -- Goldfajn overhauled the way the central bank communicated with the public and investors. No more late-night rate announcements. Monetary policy meetings would finish at about 6 p.m. local time; the announcement and an accompanying commentary would be released within minutes. He made it a more professional outfit.
Ultimately, Goldfajn will be judged on outcomes and not on doctrinaire adherence to scripture. Indeed, he may be more respected because he chose policy over consistency; I and others have pointed out that forward guidance can enervate market vigilance.
Such a deviation is not the sort of thing to try every day. Bank of England Governor Mark Carney was tagged an “ unreliable boyfriend” for policy shifts.
The Federal Reserve in some ways still suffers from walking away from projections in 2015 and 2016. The Fed went into both of those years signaling multiple rate increases and managed only one apiece. (It subsequently lifted borrowing costs three times in 2017 and again in March.) The market’s forecast was better than officials’.
Whether in Brazil or the U.K. or the U.S., the broader issues with forward guidance remain: If you are going to give forward guidance, you should be willing to deviate from it. Brazil took a bold step by doing nothing.
Maybe John Williams, soon to lead the New York Fed, was speaking a broader truth when he told Jeanna Smialek in an interview that the era of hand-holding might be nearing an end.
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