The Bank of England will give the government its blueprint for “forward guidance” when it publishes its quarterly inflation report, a big moment in British policymaking.
Canadian Mark Carney, in his second month at the helm, was heralded in advance as the man to kick start a languishing economy but with green shoots sprouting all over the place that may not be needed. Nonetheless, if companies and households can be convinced interest rates will stay at record lows for a prolonged period, that could boost investment and spending and help solidify a recovery that now looks to be in train.
After the U.S. Federal Reserve indicated that it may soon start to phase out its bond purchases – two of its policymakers again pointed to September yesterday – the Bank of England made a first stab at forward guidance last month, saying a rise in UK market rates was misguided. Now it will be more precise.
There is a trade-off. The clearer the guidance is about how long rates will stay at record lows the more effective it will be in persuading people to spend. But if time lines are spelled out, the greater the threat to the central bank’s reputation given how quickly things can change.
Earlier this year no one was talking about robust UK growth. They are now. Safer, but less definitive, to go down the Fed’s route of setting an economic target for unemployment or GDP with an inflation caveat attached.