It was in a determined effort to avoid them, having already cut interest rates as far as they could, that central banks then turned to alternative, “unconventional” monetary policies. For the most part this meant QE. Asset purchases are designed to keep a lid on forward rates, thereby supporting demand and activity. In the academic literature, however, many economists argued for an alternative – and potentially more powerful – option, namely a committed form of forward guidance. The economist Michael Woodford has been one prominent advocate[8]. Remember that the name of the game, when faced with this risk, and having run out of room to cut the policy rate any further, is to lower forward real interest rates. In this respect, a credible declaration that you will keep the actual policy rate low, even in the event of a future increase in inflation, does two things. It keeps nominal forward rates low. It also raises expected inflation. In the normal course of events the central bank would tighten policy as inflation rises, choking it off before it turns into a persistent overshoot. If you tell people you’re not going to do this then – as long as they believe you – this will push up inflation expectations and further depress the real rate of interest. In many simple economic models expected real interest rates have almost as big an effect on spending as the current real rate.
This was the first, and I daresay the last, time that MPC members were likened to an elite sportsman. )[2]  Chart 2: Forward interest rates and economic activity also co-moved closely before the financial crisis, less so afterwards  Six-month rolling averages. Combined IHS Markit/CIPS and CBI distributive trades lagged one month. Six-month change in one-year forward one-year LIBOR rate, spliced onto one-year, one-year OIS rate in 2022. Sources: ONS, IHS Markit/CIPS, CBI, Bloomberg Finance L.P. and Bank calculations. So if financial markets are able to react this way, without any explicit hints from the policy maker, why has there since been more communication from central banks about future policy – and more expectation of it in financial markets? What is the rationale for “forward guidance”? At least in theory there are two distinct types of guidance. The reasons for both, I think, are connected with changes in the economy in recent years. But they are quite distinct and it’s important to understand how. The first – sometimes described in the economics literature (somewhat grandiosely) as “Delphic” guidance – seeks in general to convey what is sometimes referred to as “private information” held by the central bank. This makes it sound more exciting than it really is. More often than not it means making clear to the outside world the policy maker’s view of how the economy might evolve over the future – its forecasts – and to clarify the so-called “reaction function” (how monetary policy might respond to possible future events).