Central banks losing their credibility over forward guidance

Former United States president Ronald Reagan was known as the "great communicator" because of his uncanny ability to present voters with a simple, consistent and credible message.

At a time when international investors are hanging on every word uttered by the world's major central banks, the monetary guardians of Britain, the US and the euro zone are struggling to communicate their policies effectively, unsettling financial markets.

Central banks' communication tools are desperately in need of a Reaganesque overhaul.

Last week, Bank of England governor Mark Carney told the World Economic Forum in Davos that his policy of tying interest rates to the unemployment rate would be jettisoned, a mere six months after it was announced with great fanfare.

The US Federal Reserve, whose unemployment rate threshold - above which it will not increase interest rates - has more or less been reached, may be forced to follow suit.

As for the European Central Bank, although it has avoided the pitfalls associated with linking future interest rate decisions to a specific economic indicator, its monetary policy is being severely challenged by its reluctance to provide extra stimulus despite the threat of deflation and a premature rise in market interest rates.