BANK Of England governor Mark Carney is expected to bring further relief to borrowers as he underlines his approach to “forward guidance” on interest rates in his debut inflation report on Wednesday.
The bank confirmed last week that interest rates would be held at their 0.5 per cent record low, and that quantitative easing would remain at £375 billion. Most analysts expect Carney to live up to past performance with a new style of communication about the bank’s expectations on the economy when he delivers the quarterly inflation report.
This is expected to include guidance on how long interest rates are set to remain low, alongside certain “thresholds” such as employment levels. This would be similar to US Federal Reserve chairman Ben Bernanke’s promise to “taper” its accommodative fiscal policy only when US unemployment hits a lower target of 6.5 per cent.
Howard Archer, chief UK and European economist for forecasting group IHS Global Insight, expects the governor to indicate that interest rates will stay at 0.5 per cent until at least late 2015.
He added: “There seems little doubt that Carney and his MPC colleagues will want to ram home the message to businesses, consumers and the markets that any tightening of monetary policy is a very long way off, notwithstanding the recent signs of improvement in the economy. To this end, we are convinced that the Bank of England will formally adopt a policy of forward guidance on interest rates.”
But there is a difference of opinion on whether Carney can persuade the nine member Monetary Policy Committee to back his efforts, particularly members worried that a long term promise on lower interest rates risks blowing the inflation target, still notionally set at 2 per cent.
Roubini Global, the macroeconomic strategy firm, said the “risks of disappointing the market with a watered down version of forward guidance... are large”.
Former MPC member DeAnne Julius expects the guidance to be a “damp squib”, adding: “I think they will hedge their bets.”
Yet some bank watchers have speculated that Carney might go beyond steering markets on the bank’s plans for interest rates, with potential for him to give more colour on plans for a “mixed strategy” of policy tools.
It is thought the governor has been considering alternatives to QE or interest rate setting in an effort to see the UK economy move into what Carney has called “escape velocity” – currently expected to be beyond the UK’s current 0.6 per cent growth figures. This could include buying assets other than UK gilts in an effort to see asset buying trickle down to SMEs and borrowers outside of banks.
However, it is thought that improving indicators for the UK economy means further asset buying can be put off unless growth reverses its trajectory or the European economy falters.