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MP: ‘Forward guidance is like an unreliable boyfriend’

Bank of England governor Mark Carney has defended his forward guidance policy after a Treasury select committee member likened it to an “unreliable boyfriend”.

In February, Bank of England governor Mark Carney scrapped the policy of beginning to consider increasing interest rates when unemployment fell below 7 per cent. Forward guidance is now based on a broader measure examining 18 economic indicators.

Speaking at a Treasury select committee hearing on last month’s inflation report, Labour MP Pat McFadden said the point of guidance is to give “clarity of expectation” and the fact that it has changed made it like an “unreliable boyfriend.”

Committee chair Andrew Tyrie agreed, adding there had been “quite a lot of guidance, not always pointing the same direction.”

When the Bank announced forward guidance last August, it published employment projections which suggested the 7 per cent kick out would be met in 2016. Carney said it was a mistake for people to use this projection as a hint for a 2016 rate rise. He said rate rises will be “slow and gradual” and will depend on economic data which can and will continue to change.

Carney said: “Businesses understood the first phase of guidance, and many of them acted on it with hiring and investment that reinforced the recovery […] and has given us more momentum than we would have thought.

“The second phase is looking to the medium term, because we all want a durable recovery so we do not want business or personal decisions taken today on investment or housing or consumption that are based on expectation of interest rates that are unlikely to transpire.”

McFadden said: “We have had a lot of different signals. We had a signal rates wouldn’t rise until 2016. We then had a market expectation they would go up in 2016 and now we have had a speech saying well now that might be an underestimation, it strikes me that the bank is behaving like an unreliable boyfriend. One day hot one day cold and the people on the other side of the message are left not knowing where they stand.”

Carney was also quizzed over last month’s Mansion House speech where he said a rate rise could come sooner than the market’s expectation of next spring.

He said the bank has a variety of channel to make these sorts of comments, including MPC minutes, speeches and inflation reports and agreed with Conservative MP that the intention was to move the market.

He said: “What we were trying to is we would like to see the markets adjust to the data and we were surprised it had not […] A short-term market for expectation of bank rate that moves around with the data […] is a healthy thing.” 

In a statement published after the session, Tyrie said: “In the space of a few minutes, the Governor confirmed that his remarks on interest rates at the Mansion House both reflected his personal views and commanded the unanimous support of the MPC. We have already had two versions of forward guidance, and several further pieces of signalling.”

“MPC members should be encouraged to give their views. We will need greater clarity, in future, on whether their remarks, including those of the Governor, are made in a personal capacity or on behalf of the MPC.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Sorry to correct Mr McFadden here, its more like and unreliable politician in the run up to an Election…. all the promises in the world – only to forget they made said promises once they’ve been voted in. Sound familiar?

  2. The Cynical Broker 24th June 2014 at 4:42 pm

    Well if anyone would know about unreliability and blowing hot then cold, it’s a politician !!!

  3. Andrew Charles 25th June 2014 at 9:26 am

    Or maybe more of an unpredictable girlfriend!

  4. The Cynical Broker 25th June 2014 at 9:51 am

    Well if anyone would know about being unreliabie and blowing hot then cold on something, it’s a politician !!

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