Quantitative or Qualitative Forward Guidance: Does It Matter?

Is publishing central bank projections of the policy rate a better way of managing market expectations than with written statements, and does it lead to overreactions by markets? To answer this, we use a quasi-experiment from the policy announcements of the Reserve Bank of New Zealand (RBNZ). Every monetary policy decision by the RBNZ is accompanied by a written statement about the state of the economy and the policy outlook, but only every second decision is accompanied by a published interest rate forecast. We exploit this difference in the information accompanying decisions to study the relative influences of qualitative and quantitative forward guidance. We find that the information releases have significant effects on asset prices regardless of the nature of the communication (quantitative or qualitative). Announcements that include an interest rate projection lead to very similar market reactions across the yield curve as announcements that only include written statements. This control-treatment approach suggests that earlier studies may overstate the effects of publishing interest rate forecasts on market prices: it is not only the interest rate forecasts that markets react to, as they seem to infer similar forward guidance from written statements. We interpret our results as implying that central bank communication is important, but that the exact form of that communication is less critical. Our results also suggest that market participants understand the conditional nature of the RBNZ interest rate forecasts, and that concerns that markets read these forecasts as binding promises are unwarranted.