Aug 8 (Reuters) – The worry about the Bank of England’s new
policy of forward guidance is not so much that the market
doesn’t appear to believe it, though that can’t help, as the
extent to which the whole plan depends on house price gains.
The BOE this week enunciated a new policy of providing the
market with forward guidance, saying it was unlikely to raise
interest rates above their current all-time low of 0.5 percent
as long as unemployment, now 7.8 percent, is higher than 7
Forward guidance, introduced by star new BOE chief Mark
Carney, is intended to drive down longer-term rates and thus
goose asset prices. It also includes a few get-out clauses which
would allow for a hike. Carney said the bank might raise rates
even if unemployment remains high: if medium-term inflation
expectations rose too much; if its own, notoriously poor,
forecasts showed inflation in 18 to 24 months will be 2.5
percent or higher; or if low rates pose a threat to financial
The BOE, again citing its own highly fallible forecasts,
said it didn’t see rates rising before late 2016.
There are two big problems with this strategy: it probably
won’t work and, if we really think about it, we probably don’t
want it to.