The International Monetary Fund has published analysis arguing that central banks should reserve explicit commitments on future interest-rate paths for exceptional circumstances, such as when rates are constrained by the effective lower bound. Such commitments can become costly when supply shocks or inflation risks change rapidly. In normal conditions, communication should instead explain the central bank’s objectives, reaction function and risks, with forecasts presented as conditional assessments rather than promises. Scenario-based communication can show how policy would respond to different inflation outcomes, demand shortfalls and financial stress while preserving flexibility and anchoring expectations. The note cautions that excessive certainty can compress market volatility and encourage risk-taking, particularly among nonbank financial intermediaries. During acute liquidity crises, central banks should communicate a clear separation between liquidity measures used to restore market functioning and any adjustment to the monetary policy stance.
2026-08-26International Monetary Fund
International Monetary Fund note calls for state-dependent forward guidance centered on reaction functions and scenarios
An International Monetary Fund note argues that explicit interest-rate path commitments should be used sparingly and remain conditional on economic conditions. Central banks should focus communication on their reaction functions, risks and scenarios, avoiding artificial certainty that can constrain policy or encourage excessive risk-taking.