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Bank boss fighting to win over forward guidance sceptics

New Bank of England governor Mark Carney will gather with policymakers for the latest interest rate meeting this week as he battles to win over sceptics of his forward guidance strategy.

The meeting is the first since the Bank pledged to keep interest rates at record lows of 0.5 per cent until the unemployment rate falls to 7 per cent.

But it has so far failed to have the desired effect on the City, with a series of caveats to the announcement prompting fears that rates might rise sooner than expected, while criticisms of the policy move are also mounting.

Influential economists on the Institute of Economic Affairs’ so-called shadow Monetary Policy Committee (MPC) have reportedly blasted the strategy, warning it will fuel inflation and lead to boom and bust cycles.

They are said to believe it is “misguided”, based on a “flawed model”, and has failed to guide market rates downwards.

While the Bank has implied rates will stay on hold until late 2016, markets have brought forward their forecasts for a hike to the first quarter of 2015.

Mr Carney used his first public speech in Nottingham last week to shore up his strategy with the blunt message that rates will stay low for at least another three years.

He also signalled the potential for more economy-boosting measures under the Bank’s quantitative easing (QE) programme should market rate expectations feed through into broader financial conditions or hamper the recovery.

So while rates will remain on hold at 0.5 per cent this month, there is growing speculation over the Bank’s plans for more asset purchases.

It is thought the MPC may also release another statement alongside this week’s rate decision reiterating once more that the rise in market rates is unjustified.

Capital Economics’ expert Vicky Redwood said she believes MPC members Paul Fisher and David Miles will resume their vote 
for more QE as early as this 
month.

“Cutting Bank Rate further would also be a powerful signal that the MPC means business, although that seems less likely for now,” she added.

Philip Shaw at Investec Economics is pencilling in a no change for QE and said Mr Carney made it clear in his recent address that it is the Bank rate that counts, rather than market expectations.

Mr Carney said interest rates on 70 per cent of loans to households and 50 per cent of those to businesses were linked to the Bank rate rather than the market. But fixed rate mortgages are linked to market rate expectations and Ms Redwood said borrowers may soon start to see a rise in the cost of these loans soon as swap rates increase.

An inflation attitude survey due out on Friday will be watched closely to see if Mr Carney’s rate guidance has resounded with households and businesses.

June’s Bank of England inflation attitudes survey revealed that 34 per cent of respondents believed rates would rise in the next year, but explicit guidance should see this pushed back and help encourage spending.

According to Mr Shaw, in trying to influence expectations of rates, the MPC is “battling better news on the economy, which continues to come in thick and fast”.

 

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