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 interest rate decisions is more effective than signalling a future rate path when rates are away from the effective lower bound. This framework guidance anchors expectations while preserving policy flexibility. Research also shows that communication influences financial conditions both at policy meetings and between them.
The existing framework bases decisions on the inflation outlook and its risks, underlying inflation dynamics and the strength of monetary policy transmission, assessed against incoming data at each meeting. It replaced directional guidance in March 2023, with an explicit role for risks added in July 2025. Rate expectations appear more responsive to macroeconomic news under this approach than during explicit forward guidance, although changes in economic conditions and policy constraints make the evidence suggestive rather than conclusive. Formal directional guidance can remain appropriate early in a forceful response to a large inflation shock, but risks conveying excessive certainty after substantial policy adjustment.
Research using large language models finds that unexpected communication shifts affect activity and inflation, although their effects tend to be smaller and slower than those of unexpected rate decisions. Communication between meetings can cumulatively influence market interest rates as much as policy announcements, particularly at longer maturities. Reaching households and firms presents different challenges because their attention to inflation varies with the economic environment. Communication therefore needs to attract attention when inflation is low and provide relevant explanations when inflation becomes more salient.