From forward guidance to framework guidance
Key themes from the ECB’s 2026 Sintra Forum on Central Banking.
The three key themes emerging from this year's ECB Forum in Sintra were:
- Greater flexibility in monetary policymaking, with central banks placing less emphasis on forward guidance and more emphasis on communicating the framework underpinning policy decisions.
- The uncertain implications of AI, which has the potential to reshape productivity and labour market outcomes but is not yet evident in the data.
- A growing focus on non-bank financial risks, as policymakers monitor the rapid growth of leveraged market participants, private credit and other sources of potential financial instability.
The European Central Bank’s annual forum brought together leaders from major central banks including the ECB, Bank of England, US Federal Reserve and Bank of Canada. Three key themes were highlighted by the keynote panel: the need for greater flexibility in conducting monetary policy, how AI advances are factoring into decision making and the importance of safeguarding financial stability.
The panel began with the head of the central banks noted above outlining the method behind their recent decisions. Evident in each response is that heightened uncertainty over first round and secondary price pressures combined with mixed messages from incoming activity data necessitate flexibility in setting the policy stance and communicating risks. Constructively, panellists expressed little concern that their economies were facing a return to the stagflationary environment of the 1970s. Strong labour markets and well-anchored inflation expectations were cited as safeguards against such a turn.
ECB President Lagarde went on to discuss the ECB’s move away from traditional forward guidance in favour of ‘framework guidance’, that is communicating the thinking that underpins its decisions versus an expectation of where to next. Governor Bailey and Chair Warsh agreed with the approach, arguing that forward guidance can ultimately make it harder to effectively manage policy if conditions evolve in an adverse manner, to the detriment of the economy. As such, inter-meeting and looking to the medium-term, market participants will be left to discern the future policy path based on policy makers’ framework, their latest risk assessments and the data that follows.
A preference for optionality and careful communication was also evident in discussions around the balance sheet. While Chair Warsh again noted a preference for a smaller central bank balance sheet, he recognised that any changes must be clearly signalled to markets before implementation. Although domestic conditions remain the primary driver of policy, the panellists were cognisant that actions in one jurisdiction can have important implications elsewhere and that this should be kept in mind.
AI’s impact on the economy and markets received considerable attention throughout the panel. While panellists broadly agreed that AI has the potential to lift productivity and expand the supply side of the economy, there was little consensus on the timing or magnitude of these effects. Chair Warsh did, however, suggest labour market changes could emerge rapidly once adoption becomes widespread. The net impact on inflation of AI adoption is difficult to discern ahead of time, so too the implications for monetary policy.
A discourse on AI and financial stability focused on the benefits of sharing research and coordinating approaches across jurisdictions. More broadly on financial markets, panellists noted the growing power of hedge funds in government bond markets. Though the risks associated with individual funds may be manageable, concerns arise when multiple investors employ similar strategies and rely on the same funding markets. A period of heightened volatility could trigger a rapid unwinding of positions, potentially spilling over into other markets.
Leveraged ETFs and the rapid growth of private credit markets were cited as other potential material risks, particularly given elevated valuations in some markets. Stronger productivity growth and technological innovation could, in time, justify these valuations but, warranted or not, a sharp correction would have lasting implications for market stability and the real economy. Governor Bailey noted that the Bank of England is actively assessing the potential implications of this myriad of risks.
Overall, policymakers are operating in an environment where the outlook can change quickly for many reasons including, but not limited to, shifts in trade policy, technological change and/or developments in financial markets. In this environment, the flexible application of a clearly defined policy framework is the preferred approach to manage the cyclical momentum of the economy, known risks and financial stability.
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