By Ben Chu
George Osborne vigorously defended the Bank of England’s much criticised forward guidance policy, insisting that the prospect of an earlier-than-expected interest rate hike was a “mark of success” for the UK’s economic policy.
“I completely reject that forward guidance has failed” said the Chancellor, speaking at the World Economic Forum in Davos. “We’re talking about exit. That in itself is a mark of success. We’re only having this discussion because there is a recovery under way.”
In a sideswipe at critics of his austerity fiscal policies he added: “Monetary policy works and [has] confounded those who said it was never going to work and that we needed other things”.
Unemployment has fallen to within a whisker of the 7% threshold at which the Bank said it would consider raising its base rate from its present record low of 0.5%. In the summer the Bank did not expect the jobless threshold to be hit until 2016, implying a long period of loose monetary policy.
However, Bank Governor Mark Carney, also in Davos, stressed again at a CBI lunch that interest rates would remain low for the foreseeable future. He said: “The degree of stimulus will remain exceptional for some time. That should help reassure British business that the path of interest rates will be consistent with a sustained recovery.”
That was echoed by one of the more hawkish members of the monetary policy committee, Martin Weale. However, Weale also opposed lowering the Bank’s unemployment threshold, telling the East Anglia Daily Times: “The purpose of forward guidance was to create greater certainty.”
At the forum, Osborne sparred with the former US Treasury Secretary Larry Summers who said he was “very gratified” by the UK’s recovery but pointed out that America, which followed a more expansionary fiscal policy, had already recovered its 2008 GDP peak, while the UK was still below.
Osborne countered that Britain had experienced a larger fall in output and that it had hosted a larger financial system relative to the economy. In response to Summers’ call for more infrastructure spending, the Chancellor insisted there is “no free lunch” and that an increase in state spending would come at the expense of credible fiscal policy.
Osborne was also quizzed on the unbalanced nature of the UK’s growth. He conceded that “a lot of the recovery has been supported by consumption” and there needed to be a “handover” from household spending to business investment. “I’m the first to say the job is not done, not even half done” Osborne said.