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. Forward guidance – avoiding potential pitfalls This transparent approach comes with potential costs. First, research highlights that increased transparency, in some cases, can be detrimental to the economy.
This is particularly the case if the public takes the Bank’s information as definitive, despite it being noisy or imperfect.8 We aim to minimise such instances by offering a full discussion of the assumptions and risks that underpin our projections, to clearly highlight the limitations in our knowledge.