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Bank report 'will tweak forward guidance'

Wednesday, 12 February 2014 - 8:53am IST | Agency: Daily Telegraph

Mark Carney will unveil the second phase of his flagship forward guidance programme today (Wednesday), as the Bank of England attempts to give a clear message on the path of interest rates and restore its credibility.

The Bank's Inflation Report will present its latest forecasts on growth, inflation and unemployment. Last August, the Bank also pledged to keep rates on hold at least until the jobless rate fell below 7pc. However, unemployment has tumbled from 7.8pc last summer to 7.1pc in the three months to November, leading to speculation that rates could rise this year. Mr Carney will argue that the economy has not yet reached "escape velocity" - where the recovery is self-sustaining - and is not strong enough to withstand a rate rise.

He will say enough slack remains in the economy for productivity to recover in the coming year, which will feed through to stronger wage growth.

Economists said the Bank was likely to move away from its "embarrassing" numerical unemployment target towards broader targets. "The nice thing for Carney is that he has a 'good problem' in that growth is more rapid than expected and the unemployment rate has fallen faster," said Nick Beecroft, chairman of Saxo Capital Markets.

"I think we'll just see a tweak in forward guidance, probably de-emphasising these monetary thresholds."

But others said it was time to move away from forward guidance altogether. Dame DeAnne Julius, a founding member of the Monetary Policy Committee, said the Bank should get "back to basics and just focus on inflation". She said a policy of "crossing the river by feeling the stones" would instil more confidence in markets than tweaks to the current guidance.

The Bank could also begin publishing a matrix of policymakers' views of interest rates over the next three years, similar to the "dot charts" published by the US Federal Reserve.

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