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Comment round-up: What's being said about Bank of England's forward guidance

by LLB Editor
7th Aug 13 9:23 am

Bank of England boss Mark Carney will unveil a new phase of monetary policy today.

The Bank is expected to announce a policy of “forward guidance”, a promise to keep interest rates low well into the future.

The Bank is likely to reduce longer-term interest rates as short-terms rates are already at historic lows. This will help the bank to “lock-in” customers at lower rates for longer.

The reforms come after chancellor George Osborne called for the BoE to consider “unconventional” methods of boosting the economy. Statistics released yesterday show that the economy is at long last starting to recover with the UK services sector rising by 1.2% in 12 months, although the recovery is still deemed to be fragile.

Here’s our round-up of the Mark Carney chatter:

The Financial Times: Senior members of the Bank don’t want to promise low interest rates.

“It is Mark Carney’s big idea to lift the UK economy out of the doldrums and into what he has termed “escape velocity”. Others interpret this as a self-sustaining recovery.

“However, while Mr Carney’s a fan of guidance, the rest of the MPC might take some convincing. Four of the current membership, including deputy governor Charlie Bean and chief economist Spencer Dale, have spoken out against forward guidance in the past.”

Former Monetary Policy Committee member Andrew Sentance has expressed his doubts about the loose monetary policy:

“I’m a bit of a sceptic about this type of forward guidance. The big challenge for Carney is moving away from emergency policy. We’re not in an economic emergency now. We need to get out of that mode of thinking.”

City A.Meditor Allister Heath in the Daily Telegraph: “Increasing rates will send shockwaves around the world”

“Upping rates by a quarter or even half a percent, for starters, would send shockwaves around the world. It would reinforce the Bank’s commitment to controlling inflation and that it believes that the worst of the crisis is behind us. It would boost confidence in the recovery, confirm that the process of normalisation has begun and act as a warning to still over-leveraged firms and families that this is the last chance for them to get their act together.”

Reuters: Carney was an early pioneer of forward guidance

“As central bank chief in his native Canada in 2009, he took what was then the unusual step of committing to putting interest rates on ice for more than a year during the worst of the crisis.

“The task looks a lot more complicated in London.”

Barclays economist Simon Hayes: No “shock and awe” expected from Carney

This [guidance] may not constitute the ‘shock and awe’ monetary activism that came to be expected from Governor Carney when he was first appointed, but the improved economic circumstances have reduced the need for emergency support.”

Sir John Gieve, former deputy governor: Forward guidance would help improve the bank’s communication with the general public

“The main impact will come through how it affects the economy.

“But Mark Carney is also very keen to reach out beyond the narrow audience of central bank watchers, to ordinary people and companies. I think he can do that if he can keep the message simple and plain.”

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