Whatever you think about the pros and cons of “forward guidance”, you can’t really deny that this is a landmark moment in the United Kingdom monetary policy, according to the Sky News Economics Editor, Ed Conway.
Conway, in his analysis, said ever since the bank was granted independence to set interest rates back in 1997, there had been a guiding principle: that the members of the Monetary Policy Committee would never pre-commit to any future interest rate moves.
When pressed, the former Governor, Sir Mervyn King, would always insist that he would decide a given month’s monetary policy only in that month itself.
As of today, the bank is explicitly committing to future interest rates. To be more specific, it will leave rates where they are – at 0.5 per cent – for as long as the unemployment rate is above seven per cent.
Given that the Bank expects it to take until late 2016 for that to happen (the jobless rate is currently stuck at 7.8 per cent), you can reasonably expect rates to remain where they are for some time yet.
Conway said, “Now, in some senses, this isn’t necessarily a departure from where we were yesterday. Interest rates are still in the same place; there has been no more quantitative easing (oh, and the above applies to QE as well as interest rates).” However, Mark Carney is gambling on this new openness and clarity being enough to help boost confidence throughout the economy.
The rationale is that if consumers are confident that borrowing costs are staying low not merely for a month but for a long, long time, they might be more willing to invest and spend.
