Central banks: the end of the era of forward guidance
August 17, 2026
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5 min
Mabrouk Chetouane
Head of Global Market Strategy – Natixis IM
Romain Aumond
Senior Macroeconomist and Quantitative Strategist – Natixis Investment Managers
Monetary policy scenario – July 2026
The energy shock resulting from the conflict in the Middle East has challenged the global disinflation scenario envisioned at the beginning of the year. Driven by volatility in energy commodity prices, short-term inflation expectations have been significantly revised, creating divergences among G10 central banks regarding the nature of the shock and the risk of persistent core inflation. Some believe this could lead to second-round effects. While the Bank of Japan (BoJ) raised rates again to normalize its monetary policy, the ECB implemented a 25-basis-point hike to prevent inflation expectations from spiraling out of control. The Federal Reserve, whose chair held his first press conference in June, has maintained the status quo. The Bank of Canada and the Bank of England have also adopted a wait-and-see approach to assess the possible impact of the shock on overall prices. Our baseline scenario calls for no change in interest rates through the end of the year. At the same time, the risk scenario envisages a broad tightening of financial conditions in the fourth quarter of 2026, which would continue into 2027. This will, of course, depend on developments in the geopolitical landscape and their impact on supply chains and energy commodity prices.
In response to a resurgence of nominal macroeconomic volatility, central banks are abandoning their forward guidance, considered too restrictive
The monetary policy symposium organised by the European Central Bank in Sintra appears to have sounded the death knell for the doctrine of monetary pre-commitment. In a move echoing K. Warsh’s first press conference, from which any forward-looking dimension had been removed, C. Lagarde introduced the concept of 'framework guidance' into ECB’s communications. This is likely to replace the 'forward guidance' that has been extensively tested over the past decade. In other words, the Central Bank's role is no longer to steer market expectations, but rather to define the methodological and interpretative framework so that market participants can derive future interest rate paths rationally. This apparent need for flexibility reflects a structural shift in global macroeconomic cyclical dynamics.
Central banks acknowledge that economies are transitioning into a world where exogenous shocks are becoming more frequent and vary in magnitude and duration. It is therefore not possible to define a clear forward-looking reaction function. A consensus appears to be emerging within the G10 that a combination of flexibility, responsiveness, and discretion is essential. In his first speech on monetary policy, K. Warsh clearly indicated the need to reexamine the Fed’s communication, particularly through the projections of Board members; the use of its balance sheet; the nature of the data used to conduct monetary policy; the role of changes in the productivity regime observed in recent years; and, finally, the determinants of inflation. This is particularly relevant given the emergence of artificial intelligence as a macroeconomic driver. The central question regarding the return to discretion in monetary policy
The key issue associated with a return to discretionary monetary policy is the risk of increased macroeconomic volatility resulting from an incomplete interpretation of policymakers’ intentions. Figure 1 illustrates the term structure of market inflation expectations since the beginning of the year.
Figure 1
The short end of the curve has seen significant volatility, particularly in Europe. This phenomenon is linked to geopolitical fluctuations that occurred during negotiations between the belligerent parties, such as the cessation of bombings targeting oil and gas production infrastructure and discussions regarding the possible reopening of the Strait of Hormuz. It was also accompanied by high volatility in interest rate projections, reflecting the market’s difficulty in establishing a clear scenario regarding the evolution of energy commodity prices and the impact of this shock on price aggregates, particularly core inflation. Against the backdrop of an unequivocal abandonment of forward guidance, this increased dispersion in inflation expectations—and, ultimately, in interest rate expectations—is likely to lead to greater dispersion in market projections for interest rates and, consequently, in bond markets.
The baseline scenario calls for monetary policy to remain unchanged for the Fed, the ECB, and the BoE, while the BoJ will continue with the necessary normalization
To assess the decisions made at the end of the second quarter and identify the current policy stances of central banks on both sides of the Atlantic, we have updated our Taylor rules and compared the most appropriate interest rate in response to the current inflationary shock. Based on our central assumption of a temporary but significant shock, with no risk of persistent inflationary pressures materializing, the various formulations of the rules suggest that the Federal Reserve could maintain its current stance until early 2027. The absence of economic overheating—GDP growth is expected to be close to potential in both 2026 and 2027—gives the Fed the necessary leeway to maintain the status quo on monetary policy.
While the ECB’s “flexible” rate hikes are supported by data available through May, the subsequent slowdown in prices and the massive base effects related to energy prices in the first half of 2027 would force the ECB to cut rates significantly. We believe, however, that there will be some resistance to lowering key interest rates in the eurozone in 2027, which would introduce an unnecessary restrictive bias for the eurozone. At the same time, the Bank of Japan (BoJ) is gradually normalizing its monetary policy against a backdrop of recovering growth, continued fiscal support, and persistent reflation in its economy.
Figure 2: Taylor rules and effective policy rates in the United States (left), the euro area (centre) and Japan (right)
Risk scenario: central banks succumb to the siren call of inflationary shocks and tighten their stance more than is necessary
The volatility observed in energy commodity markets, coupled with the subsequent reassessment of short-term inflation expectations, poses a risk to monetary policy for the remainder of the year. Under the new reaction function paradigm, central banks could become mired in a cycle of monetary tightening, justified solely by the need to meet market expectations. In the absence of prior guidance, market expectations are the only factor capable of filtering information.
We still consider this scenario to be unlikely. However, this new understanding of geopolitical uncertainty and the macroeconomic volatility regime among monetary policymakers could cause the Federal Reserve to prioritise price stability over full employment, raising its rates by 25 basis points twice between now and the first quarter of 2027. Similarly, the BoE is likely to defend its credibility by raising its key interest rate twice by early 2027. The ECB could combat this exogenous supply shock by raising its key interest rates by a further 25 basis points in September. The BoJ is expected to accelerate the normalisation of its monetary policy in order to counteract the second-round effects that are already evident in the economy.
Monetary Policy Forecasts
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Written in July 2026 by Romain Aumond and Mabrouk Chetouane
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