Forward guidance

NFI provides update on supply chain disruptions and 2021 guidance

Retrieved on: 
Friday, September 17, 2021

Availability of parts, components and chassis will impact anticipated revenue levels, with the lower end of the range reflecting the potential for further negative impacts of supply chain disruptions.

Key Points: 
  • Availability of parts, components and chassis will impact anticipated revenue levels, with the lower end of the range reflecting the potential for further negative impacts of supply chain disruptions.
  • The Company expects to generate $29 million of savings from NFI Forward in 2021.
  • The lower end of the Adjusted EBITDA range is calculated using scenarios where production continues to be negatively impacted by supply chain disruptions and increased impacts from COVID-19.
  • COVID-19 and Supply Chain Disruptions:The guidance ranges provided above are based on current expectations the impacts COVID-19 and supply chain disruptions may have on NFIs financial results for the remainder of 2021.

How do financial markets react to monetary policy signals?

Retrieved on: 
Thursday, July 23, 2020

Carlo Altavilla, Refet S. Grkaynak, Roberto Motto and Giuseppe Ragusa [1] We map ECB policy communications onto yield curve changes and study the information flow on monetary policy decision dates.

Key Points: 
  • Carlo Altavilla, Refet S. Grkaynak, Roberto Motto and Giuseppe Ragusa [1] We map ECB policy communications onto yield curve changes and study the information flow on monetary policy decision dates.
  • We find that different monetary policy measures exert effects on different segments of the interest rate term structure, with policy rate changes mostly influencing the short end of the curve and quantitative easing measures acting more on the long end.
  • A very useful by-product of this work is the publicly available Euro Area Monetary Policy Event-Study Database (EA-MPD), containing intraday asset price changes.

How to map policy communications onto financial market effects

    • The European Central Bank (ECB) has a unique way of communicating its monetary policy decisions first announcing the policy decision in a press release and then then explaining the policy decision further in a press conference.
    • This offers a natural way of separating the financial market effects of the change in policy rates from the effects associated with other policy actions and communication, by employing intraday data.
    • (2010) for the euro area, has focused on identifying the effect of monetary policy surprises on asset prices.
    • before and after a monetary policy decision, to isolate the effect of monetary policy.
    • (2019) make use of the newly constructed Euro Area Monetary Policy Event-Study Database (EA-MPD), to ask how many dimensions of policy action and communication market participants perceive in press releases and press conferences following Governing Council policy meetings.
    • The results dovetail with the general understanding of how the ECB policy communication is designed to operate.

Findings from the new Euro Area Monetary Policy Event-Study Database

    • data collected at different times on the same day, are an essential input for studying the effects of monetary policy communication.
    • Recent studies for the euro area analysing the effect of policy surprises on a limited number of asset prices include Andrade and Ferroni (2018), Cieslak and Schrimpf (2018), and Jarociski and Karadi (2020).
    • This section briefly introduces the new resource, the Euro Area Monetary Policy Event-Study Database (EA-MPD), developed in a recent study by Altavilla et al.
    • The database makes available and regularly updates intraday asset price changes around ECB policy announcements for a wide range of assets.
    • Monetary policy announcements work differently in the euro area than in the United States.
    • The press release containing the policy decisions (including, since March 2016, the policy decisions concerning non-standard measures) is released at 13:45 CET.
    • The four panels in the chart are illustrative of the different situations in which monetary policy surprises may arise during the policy meeting day.
    • Panel (a) shows no reaction of the two-year OIS rate during the press release window but a reaction in the conference window.
    • Panel (b) shows a reaction in the press release window, with no further news affecting the OIS rate in the press conference window.
    • This was a clear deviation from survey expectations among financial analysts gathered ahead of the policy meeting.
    • Policy dates like these are surprisingly rare there is usually some news for the financial markets, especially in the press conference window.

The transmission of monetary policy surprises across the interest rate term structure

    • The EA-MPD is kept up-to-date and now includes monetary policy surprises up to June 2020.
    • In order to characterise the yield curve reaction to different policy announcements Altavilla, et al.
    • Once estimated, we propose a structural identification of these factors and we find surprises that resemble policy rate change, forward guidance and QE policies.
    • Chart 2 shows that the estimated footprint that monetary policy measures leave on the yield curve varies across the two event windows.
    • The press release window features a factor related to the surprise in the immediate setting of the policy rate, affecting short rates heavily and having little effect on long-term interest rates.
    • The two factors that have always been present, even before forward guidance became an explicit ECB monetary policy tool, can be understood as both being forward guidance surprises, but with different flavours.
    • This raises the question: did the way asset prices respond to change after forward guidance became an explicit policy tool?
    • Chart 2 The footprint of monetary policy actions on the yield curve

Using the methodology on other, unofficial central bank communications

    • (2019) the methodology summarised in the previous sections is flexible enough to be easily generalised to the analysis of any policy communication, including policy speeches and market news.
    • Financial markets react to many kinds of news about monetary policy and we can parse them according to the same dimensions we have identified for the Governing Councils communication.
    • The first is a speech given by Mario Draghi on 27 June 2017, at the ECB Forum on Central Banking in Sintra, entitled Accompanying the economic recovery.
    • This makes each factor reading comparable to other readings of the same factor (but magnitudes cannot be made comparable across factors).
    • This proof of concept exercise shows that any policy-relevant news can be broken down into policy surprise factors once the initial factor extraction exercise is carried out.

Conclusions and policy implications

    • The two-stage nature of ECB policy news dissemination turns out to be helpful in identifying the market response to monetary policy announcements.
    • Importantly, we estimate and identify the footprint that different monetary policy announcements leave on the yield curve.
    • While changes in the policy interest rate mostly influence the short maturities of the curve, the impact of forward guidance policies reaches its peak at intermediate maturities.
    • We also showed how to use the policy surprise factors we identified to analyse any policy communication, such as speeches or market news, and demonstrated that the EA-MPD is a useful resource for studying future rounds of monetary policy measures and assessing the relative effectiveness of the policies announced.

References

How to signal the future path of interest rates? The international evidence on forward guidance

Retrieved on: 
Wednesday, July 31, 2019

communication by a central bank about the likely future path of interest rates, usually reduces uncertainty.

Key Points: 
  • communication by a central bank about the likely future path of interest rates, usually reduces uncertainty.
  • But it matters how this is done in practice, because forward guidance with a short time horizon can raise uncertainty.
  • This occurs if the forward guidance impairs the aggregation of private information in financial markets, thus making market prices less informative.
  • Central banks often make statements about the likely future path of interest rates by providing so-called forward guidance.
  • [2] Via forward guidance, central banks provide additional information regarding their likely response to economic developments, which can anchor expectations about future policy rates and reduce uncertainty.

The type of forward guidance matters

  • Forward guidance can be implemented in different ways. Three types of guidance have been dominant in the recent past:
    1. Open-ended forward guidance is a purely qualitative statement about the policy path. An example is the ECB’s statement used between July 2013 and January 2016 that “we expect the key ECB interest rates to remain at present or lower levels for an extended period of time.”
    2. Data-based forward guidance outlines a policy path conditional on economic outcomes. The ECB’s current forward guidance, for example, contains such an element, as the key policy rates are expected to remain at their present levels “for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.”
    3. Calendar-based forward guidance is a policy path with an explicit reference to a calendar date. An example is the current guidance by the ECB, that key policy rates are expected to remain at their present levels “at least through the first half of 2020.”
    • The ECB examples show that central banks have used different types of forward guidance over time sometimes in combination.
    • Understanding the differences between the different types of forward guidance is important to optimise its use in the future.
    • As forward guidance provides market participants with more precise information on the likely future path of interest rates, we would expect that market interest rates are less responsive to macroeconomic news than in the absence of forward guidance, and that disagreement across forecasters is reduced.
    • Open-ended forward guidance has no noticeable effect: government bond yields respond to news in a similar way as in times without forward guidance (marked by the vertical red line).
    • However, the results for calendar-based forward guidance with a short horizon are surprising: the responsiveness is amplified substantially, suggesting that in these cases markets perceive a large degree of uncertainty about where interest rates will be heading, larger even than in the absence of forward guidance.
    • In Figure 2 below, there is again no discernible effect under open-ended forward guidance, whereas disagreement is roughly halved in the presence of data-based forward guidance.
    • As with the responsiveness of government bond yields, calendar-based forward guidance with a long horizon exerts the strongest effect disagreement is effectively eliminated.
    • Calendar-based forward guidance with a short horizon, however, does not reduce disagreement.

How can forward guidance increase uncertainty?

    • The model developed in our paper explains the counter-intuitive increase in uncertainty under some types of forward guidance.
    • In this setting, forward guidance has two opposing effects on agents uncertainty about future interest rates, which affect the sensitivity of government bond yields to macroeconomic news as well as forecaster disagreement.
    • Therefore, while forward guidance directly decreases uncertainty, it makes prices less informative so that, overall, uncertainty can increase.
    • In Figures 1 and 2, calendar-based forward guidance over short horizons can be viewed as a weaker form of guidance than calendar-based forward guidance over long horizons.
    • Furthermore, weak forward guidance is shown to have only minor effects on the extent of disagreement across economic agents only if forward guidance strengthens sufficiently, does disagreement drop noticeably.
    • Figure 3 The effect of forward guidance in a model where agents learn from market prices

Concluding remarks

    • Forward guidance can provide additional accommodation when policy rates are at the effective lower bound, and also reduce uncertainty.
    • This Research Bulletin article suggests that the way forward guidance is implemented matters for its effect on uncertainty.
    • For instance, weak forms of forward guidance, by making market prices less informative, can potentially increase uncertainty.

References

Peter Praet: Providing monetary policy stimulus after the normalisation of instruments

Retrieved on: 
Thursday, March 28, 2019

Providing monetary policy stimulus after the normalisation of instrumentsRemarks by Peter Praet, Member of the Executive Board of the ECB, at The ECB and Its Watchers XX Conference, Frankfurt am Main, 27 March 2019The key ECB interest rates remained the instrument for adjusting the monetary policy stance.

Key Points: 

Providing monetary policy stimulus after the normalisation of instruments

    Remarks by Peter Praet, Member of the Executive Board of the ECB, at The ECB and Its Watchers XX Conference, Frankfurt am Main, 27 March 2019

    • The key ECB interest rates remained the instrument for adjusting the monetary policy stance.
    • [3] The aim of the APP was to prevent acute and persistent disinflationary pressures from destabilising medium-term inflation expectations and potentially spiralling into outright deflation.
    • The normalisation of instruments was implemented in such a way as to preserve the degree of accommodation necessary for continued inflation convergence even after the end of net asset purchases.

    Rotation back to the “normal” instrument of monetary policy

    • While further accommodation was initially provided by additional cuts in policy rates into negative territory, the APP became the tool for adjusting the level of monetary accommodation.
    • In the process of rotating back to forward guidance on policy rates as our main instrument, it was essential to preserve the degree of monetary accommodation required for continued inflation convergence.
    • Our reinvestment policy reinforces the effects of forward guidance on policy rates.

    Preserving significant monetary stimulus

    • In the light of the downward revisions to the macroeconomic outlook, additional measures were needed to preserve the ample degree of monetary accommodation supporting inflation convergence towards our aim.
    • Long-term interest rates and, indirectly, financial conditions depend on market participants expectations of the path that monetary policy interest rates are likely to follow.
    • So, under current conditions, our indications regarding the most likely evolution of the policy rates are a key instrument for setting the monetary policy stance.

    Concluding remarks