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Finance
Forward Guidance
When central banks publicly tell the market what they plan to do with interest rates in the future.
Forward guidance is a powerful tool because it influences expectations even before any actual rate change. Clear guidance can reduce market volatility. However, if the central bank changes its mind later, markets can react very sharply.
It's the central bank whispering to the market 'we plan to keep rates low for the next two years' so everyone can plan ahead.
Real world: The Bank of England says "we expect to hold rates steady until at least mid-2027." Markets immediately price in that expectation and bond yields and stock prices react.
💡 Forward guidance is how central banks try to control the market using words instead of actions.