The Bank of England’s Governor, Mark Carney, will usher in a new era of policymaking this week as the Canadian prepares to unveil forward guidance on interest rates for the first time.
The Chancellor George Osborne – who is depending on “monetary activism” from his central bank chief to help secure economic recovery as he pursues deficit-cutting plans – asked the Bank to examine options for linking policy changes to factors such as falling unemployment in March’s Budget.
Such guidance – if implemented – would amount to a third major policymaking lever available to the Bank’s Monetary Policy Committee, (M PC) alongside interest rates and pumping money directly into the economy through quantitative easing (QE).
Investec’s economist Victoria Clarke said: “It’s probably the most significant week for the Bank since the launch of QE in 2009.”
Mr Carney previously used time-related guidance at the Bank of Canada in 2009, committing to keep interest rates low until June 2010 to encourage spending in the economy. In February, he told MPs that the move “reached over the heads of central bank watchers and the financial markets and directly to Canadians and sent a message that there was going to be stimulus for a period of time”.
The new Governor has already taken an activist approach to monetary policy during his first month in Threadneedle Street, issuing a statement to curb “unwarranted” rises in market interest rates amid fears over the US Federal Reserve slowing the pace of its own money-printing programme.
But the Canadian may struggle to sign up colleagues to explicit pre-commitments to keep rates low for years to come with six of the MPC’s nine rate-setters voting against further stimulus until Mr Carney joined. Inflation is well above the Bank’s 2 per cent target at 2.9 per cent and the economy grew at an improved pace of 0.6 per cent between April and June.
Deutsche Bank’s chief economist George Buckley said the most likely option would be non-explicit guidance akin to that adopted by the European Central Bank in July when it said that rates would remain at “current or lower levels for an extended period”.
He said: “In our opinion, the Bank needs to be (and will be) vague in its prognosis on guidance. In other words it will be ‘guidance’ in the truest sense of the word, rather than an explicit time or data-based pre-commitment.”