Forward guidance will be back by the end of this year; Currency implications – BofA

Bank of America Global Research discusses its expectations for the policy trajectory of major central banks.

Assuming that inflation does indeed prove to be persistent, we would expect most central banks by the end of this year or early next year to bring some form of forward-backward guidance. Instead of rising further, they could commit to keeping interest rates high for as long as it takes to bring inflation back to target, or close enough. This is very similar to their commitment in the era of low inflation, to keep interest rates low until inflation returns to target,” notes BofA.

Assuming we obtain such forward guidance, the currency implications will depend on the timing, the strength of the commitment and how much interest rates have increased in the meantime. As an exercise, let’s assume that all G10 central banks will rise as much as the markets are pricing today, but will not cut rates in the next 2 years. Exhibit 5 suggests, keeping everything else constant, this will be positive for the USD and CAD, especially against the JPY and EUR“, adds BofA.

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