Forward guidance is the information provided by a central bank about its future monetary policy intentions based on the outlook for price stability.
Forward guidance is particularly useful when interest rates are at very low levels and it is no longer possible nor desirable to lower them further. By giving indications of its intentions, the ECB gives economic agents a clearer understanding of how financing costs might evolve and provides the necessary stimulus to the economy. Indicating future intentions makes the ECB’s monetary policy more effective and makes the achievement of its main objective easier: to serve European citizens by maintaining price stability.
The ECB began using forward guidance in July 2013 when the ECB’s Governing Council said that it expected interest rates to remain low for an extended period of time. Since then the formulation of the ECB’s forward guidance has been adapted on a number of occasions.