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TSC member Jesse Norman attacks BoE forward guidance

Treasury select committee member Jesse Norman says the Bank of England’s forward guidance policy is “a lot of arm waving” and lacks substance.

In February, Bank of England governor Mark Carney scrapped his own threshold for increasing interest rates when unemployment fell below 7 per cent. Forward guidance is now based on a broader measure examining 18 economic indicators.

In his Mansion House speech earlier this month, Carney suggested the Bank could increase interest rates sooner than markets expect.

In a pre-appointment hearing for MPC member Kristen Forbes yesterday, Norman said it is “far from clear” the Bank’s forward guidance policy has any substance.

He said: “What is the constraint? We saw employment figures aren’t a constraint. The employment figures were no sooner announced as a threshold and it was broken.

“Then it looked like [interest rate rises] would be early next year until the governor said it might be this year. Where is the substance? All it really amounts to is a lot of arm waving until the governor tells us rates will go up or down.”

In response, Forbes said it was useful for the Bank to make clear the basis on which it was making its decisions. She said: “The target of the MPC is to set medium term inflation expectations. We do not know where inflation will be in the future and the way monetary policy works is there is a long lag between when you address monetary policy to when it effects the economy, so you have to make decisions in advance based on what data is available.”

Forbes also said she had asked the Bank why it had a target to keep inflation at or around 2 per cent and received only a “vague” answer.

She said: “They said years ago when the debate was occurring there were some academic papers that suggested around that range was an appropriate level. Very vague.”

Conservative MP Mark Garnier said it was “extraordinary” the Bank’s inflation target had not been changed, suggesting one based on GDP instead.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. This is yet another example of me saying “oh how I wish i’d published a book” each time I see the eco-political chickens coming home to roost. This time it goes back to what I was saying to clients months ago when ‘Forward Guidance’ was proclaimed as a stabiliser, which was basically “watch this rhetoric morph in to something akin to a flying pig!

  2. Oh I thought it was just me! Forward Guidance is the financial chocolate poker, as soon as it gets warm it melts – what is the point?

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