United Kingdom: BoE introduces new phase of Forward Guidance
February 19, 2014
At its 5-6 February meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and left the stock of asset purchasing at €375 billion. Both decisions, which the MPC made unanimously, were in line with market expectations.
On 12 February, in presenting the Quarterly Inflation Report, BoE's Governor Mark Carney announced the new phase of Forward Guidance (FG). FG was first introduced at BoE's 7 August monetary policy meeting, in which the Bank committed itself to keeping the interest rate unchanged until the unemployment rate falls below the 7.0% threshold, something it did not foresee happening until Q2 2016.
The Bank stated that the economy has been growing at a healthy rate and that the labor market gains have been strong. The latest economic data show that the unemployment rate is falling faster than expected. As a result, the Bank now foresees the rate reaching the threshold in the fist quarter of this year. Despite the fast fall in the joblessness rate, the MPC acknowledged that growth has not been accompanied by a pick up in productivity thus far. The Committee considers that there is spare capacity in the labor market since the output gap - the difference between the current and the potential growth - is around 1.0% to 1.5% of GDP. The Bank's "new phase" of guidance underlines that the Bank can afford to keep the interest rate on hold while there is still slack in the economy. However, it added that the interest rate may rise before the slack is fully absorbed.
Regarding price developments, the Bank acknowledged that CPI inflation has fallen back to the 2.0% threshold faster than expected. The future inflation path depends on, "the pace at which slack is absorbed and the impact that slack has on wages and prices." According to the minutes, none of the three, "knockout conditions that would override the forward guidance," has been breached. The knockout conditions are: inflation above 2.5% over the next 18 to 24 months; medium term inflation expectations not "sufficiently well" anchored; and financial instability. The next monetary policy meeting is scheduled for 5-6 March.
All of the FocusEconomics Consensus Forecast panelists expect the BoE to leave interest rates unchanged at 0.50% this year. For next year, the majority of panelists expect the BoE to stay put, resulting in a year-end projection of 0.54%.
Author: Dirina Mançellari, Senior Economist