The new Governor of the Bank of England, Mark Carney, came to the job with a ‘rock star’ central banker reputation which his predecessor, Sir Mervyn King, lacked. Mr Carney was expected to reform the Bank’s policies and in August he took a major step in this direction.
What he did was make an announcement which fits the economic euphemism of the moment, ‘forward guidance’. At its simplest, forward guidance means telling the market the central bank’s views of (and plans for) future short term interest rates. However, in the UK context it was not that simple. Mr Carney told us that the Bank “intends not to raise Bank Rate from its current level of 0.5% at least until … the unemployment rate has fallen to a threshold of 7%”, which the Bank’s economists predict will be in mid- 2016. The current (April-June) unemployment figure is 7.8%.
It was not – despite the various “another three years” headlines – a blanket promise. The Bank detailed three “knockouts” (its words) that would prompt earlier action:
- The Bank considers it more likely than not, that CPI inflation 18-24 months ahead will be 2.5% or more;
- Medium-term inflation expectations no longer remain “sufficiently well anchored”; and
- A significant threat to financial stability related to the continued low rates.
The Bank (and the Chancellor’s) hope is that the guidance encourages companies and consumers to borrow, safe in the knowledge they will not be hit by a sudden rise in rates. Mr Carney used a similar approach in his last job, at the Bank of Canada, when he said in April 2009 rates would stay flat for at least a year.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.