29 Oct 2013

Forward guidance could damage central banks - Wheeler

7:12 am on 29 October 2013

Reserve Bank Governor Graeme Wheeler says central banks are in danger of damaging their credibility when using forward guidance to spell out interest rate plans.

Graeme Wheeler.

Graeme Wheeler. Photo: RBNZ

The practice has been adopted by the likes of the US Federal Reserve and Bank of England which have tied interest rate rises to lower unemployment rates.

But lower unemployment in the United States did not prompt the Federal Reserve to reduce its stimulus programme as expected in September, mainly because the fall has been driven by people dropping out of the workforce.

Mr Wheeler says such approaches to reinvigorate struggling economies have their downsides and could potentially harm central banks' standing with consumers and investors.

He says it also has consequences for other economies and has resulted in upward pressure on the New Zealand exchange rate, for example, which he says has been damaging.

"I think central banks - some of them - have gone too far with their forward guidance.

"Basically, they're saying we don't expect to raise short-term interest rates for another three years, which is what they've done at the Bank Of England, for example. I think it creates potential credibility issues for central banks."