Bank of England

John Aglionby

Mark Carney, governor of the Bank of England, is appearing before the House of Commons Treasury Select Committee for the first time since he introduced his forward guidance, which states that interest rates will stay at their current low level at least until unemployment falls to 7 per cent. The BoE said in August it does not expect this to happen until mid-2016 but the markets are increasingly pricing in an interest rate rise at the end of 2014 or early 2015.

By Claire Jones and John Aglionby

 

Claire Jones

Not Bernanke

Jackson Hole, the nearest thing on the central banking calendar to Davos, is upon us again, with some of the world’s most senior monetary officials set to head out to the upmarket Wyoming resort over the next few days.

Unlike the annual bash in the Swiss Alps, however, Jackson Hole, which kicks off on Thursday evening and closes on Saturday night, is usually a bit more than a talking shop. Of late, it has been the venue of choice for Fed chair Ben Bernanke to offer clues on where policy is heading.

But, while tapering looks like it is almost upon us, those hoping for more detail on the pace at which the US central bank will slow its asset purchases will not get it from Bernanke this weekend. Read more

John Aglionby

The Bank of England has promised to keep interest rates at record lows until the unemployment rate falls to 7 per cent, a radical change of monetary policy in the world’s sixth largest economy.

Mark Carney, the BoE’s new governor, unveiled the policy on Wednesday, alongside forecasts that show the central bank does not expect the unemployment rate to reach that level until at least mid-2016.

The policy, which is similar to the one adopted by the US Federal Reserve, is aimed at reassuring markets and the public that monetary policy will not tighten any time soon.

But the Bank of England said it would reconsider if inflation was set to be 2.5 per cent or higher in the medium-term, if inflation expectations were becoming out of control, or if the policy was threatening financial stability

“The message is that the MPC is going to maintain the exceptional monetary stimulus until unemployment reaches 7 per cent and then we will reconsider,” Mr Carney told his first press conference since he took on the top job last month. “We will do this while maintaining price and financial stability.”

There was a muted response from investors. The FTSE 100 fell 0.8 per cent, yields on 10-year government bonds climbed 3 basis points and sterling rose 0.5 per cent against the dollar.

Mr Carney said the economy was recovering, but remained far too weak. “This remains the slowest recovery in output on record,” he said. “We’re not at escape velocity right now.”
He stressed the 7 per cent unemployment rate was not a target, but a “way-station” on the path to full recovery.

By Sarah O’Connor, John Aglionby and Catherine Contiguglia. All times are London time

 

Claire Jones

(Getty)

1. Wednesday’s inflation report press conference has been billed as a massive day for the MPC, in particular the new governor Mark Carney. Why?

The Bank of England is set to unveil a framework for what is known in central bank parlance as forward guidance. That involves telling markets -and the public – that central bank cash will remain ultra-cheap until the economy returns to rude health.

It would be one of the most substantial changes to the UK’s monetary policy framework since the rate-setting Monetary Policy Committee became independent in 1997.

It is also 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 Carney is a fan of guidance, the rest of the MPC might take some convincing. Four of its current members, including deputy governor Charlie Bean and chief economist Spencer Dale, have spoken out against forward guidance in the past. Read more

Chris Giles

London’s weather has been balmy and hot since Mark Carney became Bank of England governor. Only marginally less absurd have been other reviews of his first week in the job such as the BBC’s efforts to link a 6 per cent rise in equity prices to his tenure at Threadneedle Street.

The FT gave a more sober analysis of the first week on Saturday, pointing out how difficult it is for anyone to fight the Fed. The BoE’s statement on Thursday that rises in market interest rates since May were not warranted, seemed not to have impressed government bond or forward interest rate markets much by the end of the week.

A few days on, it is only fair to have another look. And the delayed reaction is more favourable to Mr Carney’s action, although it remains far too early to declare victory for forward guidance. Read more

Claire Jones

What is forward guidance?
Forward guidance has been around for a while (it was pioneered by the Reserve Bank of New Zealand 16 years ago) and can take many forms.
But, as the FT’s Frankfurt bureau chief Michael Steen writes here, all of them boil down to saying — or at least hinting at — what you’re going to do before you do it.
Until recently, guidance usually involved central banks using a mix of their economic projections and their inflation targeting frameworks to show markets whether their expectations of the direction and timing of policy changes were right or not. It was all a bit techy and abstruse.
No longer. Most of the focus recently has been on forms of forward guidance that the public — as well as markets — can easily understand. These more explicit forms of forward guidance involve central banks promising to keep monetary policy ultra-loose either until a fixed point in the future, or until economic conditions pick up.

 Read more

For many years, one of the most enduring mantras of central banking was along the lines of “we never pre-commit to future actions, because all of the information we have about the state of the economy is already contained in the actions we have just announced”. Now that has been completely abandoned. With the ECB and the BoE changes announced today, the central banks are shouting from the rooftops that “we are all forward guiders now”. Read more

Claire Jones

One of the few occasions when I’ve used a ruler since leaving school is during the Bank of England’s inflation report press conferences. I’m not alone — for years a ruler has been an essential tool for those trying to fathom what monetary policy makers thought was going to happen to growth and inflation in the months and years ahead.

The BoE’s practice of waiting a week between releasing its quarterly fan charts for growth and inflation and the data underlying them left bank-watchers with little choice but to dig out the ruler to work out where the MPC thought growth would be in, say, 2014. As Chris Giles commented here, there were several problems with this approach.

Now, thanks to the Stockton Review, reporters need no longer remember their rulers (hat tip to George Buckley at Deutsche Bank for the headline of this post). Read more

Chris Giles

If you read today’s Bank of England inflation report, you will notice some welcome changes. More will follow on this blog about the improvements in BoE transparency. In the meantime, the five things you need to know about the bank’s economic outlook are: Read more

Claire Jones

Brits wanting a holiday in the sun have to stump up a lot more since the pound’s crash during the financial crisis. Even after a partial recovery, the pound remains down almost a fifth in real terms against its trading partners.

On the plus side, exports should be booming. Sadly, they aren’t. There are plenty of excuses explanations, but one stands out: British exporters have too much focus on slow-growing European economies and not enough on the whizzy emerging markets. The killer statistic is that the UK exports more to tiny troubled Ireland than to all the Brics put together. Read more