In a keynote speech at the Bank of England and its Watchers Conference in London, European Central Bank (ECB) Executive Board member Philip R. Lane argued that explaining the criteria guiding policy decisions is more effective than signalling a future interest rate path when rates are away from the effective lower bound. This approach, known as framework guidance, anchors rate expectations while preserving flexibility and reducing the risk of misinterpretation.
The existing framework bases decisions at each meeting on the inflation outlook and its risks, underlying inflation dynamics, and the strength of monetary policy transmission. It replaced formal directional guidance in March 2023, with an explicit role for risks added in July 2025. Directional guidance may be appropriate early in a forceful response to a large inflation shock, but can convey excessive certainty after substantial policy adjustment. Under elevated uncertainty, baseline projections remain an information anchor. Alternative scenarios can clarify the potential impact of material risks, but should not overshadow the broader risk assessment.
Research reviewed in the speech shows that communication can influence rate expectations and risk premia independently of policy changes. Communication between meetings can have cumulative market effects comparable to policy announcements, particularly at longer maturities. Rate expectations also appear more responsive to economic news under framework guidance, although changes in economic conditions and policy constraints prevent a conclusive comparison with explicit forward guidance. Reaching households and firms presents a different challenge because their attention to inflation rises when inflation is high and falls when it is low. Communication therefore needs to reflect the economic environment, as inflation expectations influence wage setting, pricing and spending decisions.