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
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
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.
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.
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
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
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
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
Future BoE governor Mark Carney. Getty Images
Bank of England governor-designate Mark Carney talked a lot today about his fondness for so-called “forward guidance” — where a central bank indicates what is likely to happen to monetary policy way beyond its next policy vote.
The theory is that forward guidance boosts growth by providing more certainty to lenders that they will be able to access cheap cash from the central bank for a long time to come. Convinced of this, banks will reduce borrowing costs and lend more. And, with rates remaining lower for longer, savers will believe there is little point in holding cash and will go splurge. Read more
Mark Carney, the incoming governor of the Bank of England, was grilled by MPs and his ECB counterpart Mario Draghi faced awkward questions. By Tom Burgis, Ben Fenton and Lina Saigol in London with contributions from FT correspondents. All times are GMT.
Pretty much everyone is expecting the Monetary Policy Committee to do the same thing it has done for the past six votes and stand pat on Thursday, when governor-designate Mark Carney is also due to appear before MPs at the Treasury Select Committee.
But one former deputy governor, Sir John Gieve, thinks there’s a chance that the MPC could vote in favour of easing policy. Read more