Monetary policy

What is forward guidance?

Forward guidance is a tool used by the central bank to provide indications about its monetary policy intentions, including the expected future path of its key interest rates. Forward guidance on future monetary policy decisions is based on the European Central Bank (ECB) Governing Council’s assessment of the current economic situation and, in particular, inflation developments and outlook. This tool allows the ECB to influence medium and long-term interest rates through expectations about the future path of key interest rates and other instruments (such as asset purchases), which is particularly useful when those rates are close to their lower bound, i.e. when there is little scope to reduce them any further.

The ECB began using forward guidance in July 2013 when the Governing Council announced that it expected interest rates to remain low for an extended period of time. Since then the formulation of the ECB’s forward guidance has been adapted on a number of occasions.

At its monetary policy meeting of July 2021, the Governing Council adapted its forward guidance to reflect the outcome of the most recent monetary policy strategy review (see press release File PDF: Opens in a new window (211 KB) of 22 July 2021). This new forward guidance made interest rate developments conditional on the medium-term inflation outlook and changes in underlying inflation – which excludes the most volatile components of overall inflation (see How is inflation measured?) –, likewise over a medium-term horizon. The Governing Council thereby aims to avoid a premature tightening of monetary policy in response to inflation running above the target due to factors considered to be temporary.

Forward guidance allows consumers and businesses to make saving and investment decisions with more information on the future path of short-term interest rates.

In addition, after the Governing Council’s monetary policy meetings, the ECB offers not only guidance with regard to the expected future path of key interest rates, but also information on the time horizon of the asset purchase programme.

The most recent ECB Governing Council statements and the current forward guidance can be found in the monetary policy decisions section of our website.