Forward guidance - what do the experts think?
The Bank of England has announced a revamped forward guidance, which appears to confirm that base rate will be staying at rock bottom for some time to come.
The ‘next phase’ of forward guidance lays out much broader parameters, with the clear intention of shifting the emphasis away from the rapidly falling unemployment figures that have caused so much speculation of late.
One of the main focuses of Mark Carney, governor of the Bank of England, is now to absorb the ‘slack in the UK economy’ and counter lower-than-expected productivity, before tinkering with the interest rate or reducing quantitative easing.
Beyond that, Carney has said that any interest rate rises will be ‘gradual’ and ‘limited’, with a reference to rates being at 2 per cent in three years’ time.
But broader forward guidance, which now contains five key elements and 18 economic indicators, has left commentators divided.
Jonathan Loynes, chief European economist at Capital Economics, says the new system is much more complicated. ‘This “second phase” of guidance obviously lacks the simplicity of the previous one. And there is a clear concern that, in putting more focus on the general degree of spare capacity, it replaces the unemployment rate with an even more unpredictable, and much less observable, economic concept,’ he explains.
But Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA), thinks the changes to forward guidance are ‘a sensible move’.
‘It should not surprise anyone that the Bank is monitoring 18 economic indicators overall. This is prudent policy and no more than is required to safeguard the recovery,’ he says.
Trevor Welsh, head of UK sovereign and inflation at Aviva Investors thinks the announcement marks ‘a sea-change in policy’, but admits the new guidance will be more tricky to navigate.
‘Forward guidance with 18 separate indicators will inevitably take us back to focusing on monthly meetings. Nobody will be sure of the time line for interest rates until the bank announces its interpretation of the myriad evolving data it considers key to its decision-making process,’ he says.
Meanwhile Schroder’s UK economist Azad Zangana has branded the new guidance is a ‘bamboozling cluster bomb’ that ‘highlights the Bank’s reluctance to raise interest rates’.
‘The change in the Bank’s communication policy looks like a “confuse and conquer” approach. [Its] smoke and mirrors approach to forward guidance – which on the one hand will highlight the degree of complexity in setting monetary policy while on the other will thoroughly confuse the average person – will certainly introduce a new uncertainty for expectations on the future path of interest rates,’ he adds.
But Loynes thinks the industry should not get too distracted by the review: ‘It is easy to forget amidst the forward guidance shenanigans that the MPC’s remit from the government has remained the same – to hit a target for CPI inflation of 2 per cent.’