Bank policy provides ‘culture of openness’

Yorkshire Building Society Chief Economist Andrew McPhillips
Yorkshire Building Society Chief Economist Andrew McPhillips
Have your say

ONE of Yorkshire’s leading economists has said that the Bank of England’s forward guidance policy has given it “a new culture of openness” and has not hurt its credibility after a poll this week threw the spotlight on criticism of its approach.

Andrew McPhillips, economist for Yorkshire Building Society, said that this “new culture of openness” gives the BoE the opportunity to set out its thoughts for the future path of monetary policy and reinforce the reasoning behind why interest rates will not increase for this year at least.

His comments came after a Reuters poll this week reported that 28 out of 56 economists surveyed said that the BoE has lost credibility over its forward guidance framework, even before it is expected to be revamped in February.

Central banks in various advanced economies resorted to “forward guidance” – advance notice that monetary conditions will not be tightened too fast or too soon – as a way of managing market bets, at a time when the scope for stimulating economies through conventional interest rate cuts was limited.

But the guidance has come under a lot of criticism and has had mixed results.

When it was first introduced in August, the policy’s attempt to dampen expectations of interest rate hikes had the opposite effect. Investors brought forward their bets on rate increases.

At the time, the BoE promised to keep rates at a record low at least until unemployment fell to seven per cent, something it forecast would take more than three years.

But in November, the BoE forecast unemployment could hit seven per cent as early as the end of this year.

It also stressed that higher rates would hinge on other factors, such as labour market productivity.

The message of a broader focus was reinforced last week by BoE policymakers after the jobless rate fell to just above the seven per cent threshold.

Mark Carney, the Governor of the BoE, urged against “unnecessarily focusing too much on just one indicator” and indicated the Bank was in no hurry to raise interest rates.

Some argue such shifts are a natural progression of guidance as economic conditions improve. Others say they represent a certain back-tracking of a policy which was flawed in the first place.

Mr McPhillips said: “The guidance stated that the Bank would not consider increasing interest rates at least until the unemployment rate reached the seven per cent threshold.

“It was very clear that this did not imply an immediate change of policy when the threshold was reached yet some commentators have chosen to ignore this.

“It also isn’t only the Bank which has been surprised by the sudden fall in unemployment. At the time the policy was announced even the most optimistic forecasters didn’t expect unemployment to fall to its current level and some were still forecasting increases up to eight per cent.”

He said that while inflation remains at or around the monetary policy committee’s two per cent target, “there is little reason to expect rates to increase while the Bank is still rightly concerned about the low rate of wage growth and whether the pace of consumer spending can be maintain- ed”.

He added: “Increasing rates any time soon could worsen this situation and weaken the re- covery.”

Within responses to the Reuters poll, a slight majority of British banks did not think the BoE’s credibility had been hurt by forward guidance.

A majority of banks headquartered outside Britain thought it had.