Mark Carney swept into the gilded halls of the Bank of England last month on the promise that he would use unconventional methods. Sure enough, the new Governor not only struck a more managerial tone following his first Monetary Policy Committee meeting yesterday; he also set out Britain’s first ever “forward guidance” on interest-rate policy, importing a strategy deployed in the US and, by Mr Carney himself, in Canada.
In layman’s terms, forward guidance means giving a longer-term steer on interest rates, so that financial markets, businesses and households – safe in the knowledge that they are staying low – are encouraged to undertake the lending, spending and investing needed to support economic growth.
The innovation was on the cards as soon as Mr Carney was named as Lord King of Lothbury’s replacement. What was new yesterday was the detail. Alongside the decision to hold interest rates at 0.5 per cent, the MPC set out its intention to keep them that way until unemployment drops below 7 per cent (it is now 7.8 per cent). Equally, while there is no plan for further quantitative easing, neither will any of the £375bn of assets purchased so far be sold until the same threshold is reached.
Given Threadneedle Street’s traditional reticence, this is a wealth of insight. It is also particularly apposite now. With the economy finally showing signs of life, and inflation still running well above the 2 per cent target, questions are already being asked about when interest rates might rise. And yet, as Mr Carney noted, this is the slowest recovery on record. Indeed, the Bank predicts annual growth will still be below the historical average in two years’ time. By hitching interest rate-setting to an unemployment level which requires 750,000 more jobs to be created and is not expected to be met for several years, the MPC hopes to stop the nervous from jumping the gun and stalling the recovery.
Will it work? Perhaps a little. But for all Mr Carney’s sprinkling of stardust, it would be unwise to expect too much. After all, just as rates will not necessarily go up when the 7 per cent threshold has been reached (a rise will merely be considered at that point), so a number of variables – rising inflation expectations, for example – will trigger a rethink in the meantime.
Such flexibility is quite right. The economy is far too complex for one-size-fits-all policies. But with so much still up for grabs, forward guidance is left doing little more than confirming that the MPC will do what it thinks right, when it thinks it right to do so. All that has changed, then, is that the new Governor is sharing slightly more detail about what right might look like (with the proviso that it, too, may change, depending on circumstances).
That is not to say that forward guidance has no place, only that – like quantitative easing before it – it is no quick route to recovery. Sad to say, there is no such thing – even for the unconventional Mr Carney.