Forward guidance will be laid to rest next week - EY ITEM Club

6 February 2014

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  • Forward guidance will be laid to rest next week…
  • …hopefully to be replaced by a focus on a wider range of indicators
  • Raising rates now would risk choking off the recovery

Andrew Goodwin senior economic adviser to the EY ITEM Club, comments on today’s MPC decision:

“All thoughts turn to next Wednesday when forward guidance is set to be laid to rest. Although unemployment is still technically above 7%, recent indications suggest this threshold will be hit imminently. The MPC has no option but to revisit it next week. The Bank’s courtship with forward guidance has been brief and is now in tatters.

“Falling unemployment was expected to act as a diagnostic for the wider economy. But this has not proved so - real wages have failed to grow, and business investment is still in the doldrums.

“The Bank will want to focus on a broader range of measures going forward, and not pin their decisions on one key indicator. This will effectively be returning to the style of monetary policy conducted before forward guidance. The Bank will continue to insist that rates will stay low, and hope the markets believe them.

“Fortunately for the Bank, inflation has become better behaved and looks well anchored. They still possess credibility, which is vital for controlling inflation expectations. This will give them time to wait for a period of real wage growth and a broadening out of growth before they raise rates. Raising rates prematurely would risk choking off the recovery.”