As Mark Carney speaks to UK business leaders at the University of Nottingham in his first public address as governor of the Bank of England, ALLNewsBlog hopes he puts more meat on his recent attempt at forward guidance.
The concept of forward guidance on monetary policy surely is that one specific direction is indicated, and that direction has been selected from among many other equally plausible alternatives. Thereby new information is conveyed to markets.
But when Carney revealed his much-trailered forward guidance at a press conference on August 7 it sounded more like…well, like a school lecture, than the revelation of hard policy choices.
Carney said the bank won’t raise interest rate from the current 0.5% until UK unemployment has fallen to at least 7.0% from the current 7.8%, and that is stands ready to undertake further stimulus as long as the jobless rate stays above 7.0 percent.
So far so good, but then Carney added three “knockouts” that would negate this guidance.
(i) if inflation appeared likely to breach the bank’s 2% target by half a percentage point or more,
(ii) if medium-term inflation expectations no longer remain sufficiently well anchored; and
(iii) if the lower-rate policy stance poses a significant threat to financial stability.
The knockouts, while eminently sensible, left the entire forward guidance looking a bit wobbly.
Carney’s policy statement struck most market observers as little more than business as usual for a central bank, exactly how you would explain to economics students how interest-rate policy is set. Long-term interest rates have edged up in response, the opposite of what Carney presumably wants.
If this was forward guidance, ALLNewsBlog wonders what were the alternatives that Carney has decisively ruled out. Raising interest rates for no particular reason and in the face of a weak economy even when inflationary pressures are weak? Stubbornly keeping interest rates low even as inflation soars into double digits and the banking system crumbles?
Hopefully, by the time Carney has finished speaking on Wednesday, UK monetary policy will have graduated from sixth form to university.