United Kingdom: BoE adopts Fed-style forward guidance, links rates to unemployment
August 8, 2013
The Monetary Policy Committee (MPC) of the Bank of England (BoE) set a numerical threshold for unemployment as guidance for its monetary policy, thus embracing the type of monetary policy strategy previously adopted by the Federal Reserve. In presenting the July Inflation Report on 7 August, Governor Mark Carney announced that the BoE will maintain the Bank Rate at 0.50% until the unemployment rate falls below 7.0%, which - according to the BoE forecast - will not happen before Q3 2016.
Moreover, the BoE will keep the size of asset purchases at the current level of GBP 375 billion until the unemployment goal is reached. In addition, the BoE stands ready to increase the size of asset purchases if, "additional monetary stimulus is warranted," provided that the unemployment rate remains above 7%.
The strategy adopted by the BoE remains conditional on three "knockouts". The threshold guidance will cease to apply if inflation moves above 2.5% over the next 18 to 24 months; if medium term expectations are not "sufficiently well" anchored; or if the BoE's Financial Policy Committee (FPC) determines that the monetary policy stance poses a threat to financial stability. However, should one of these "knockouts" occur, it would not automatically lead to an increase of the Bank Rate or a reduction in the sale of assets. Rather, the MPC will evaluate the course of action month to month.
All FocusEconomics Consensus Forecast panellists expect the BoE to leave interest rates unchanged at 0.50% this year. For next year, a majority of panellists also expect the Bank to stay put, resulting in a year-end projection of 0.54%.
Author: Armando Ciccarelli, Head of Data Solutions