BANK of England governor Mark Carney has insisted that his forward guidance policy is not dead, but will be changed.
Speaking to Scotland on Sunday last week, he said the Bank would “take stock” of the faster-than-expected fall in unemployment and that forward guidance would “evolve”.
Carney’s forward guidance was introduced last summer and was welcomed by the markets for providing a longer-term outlook on interest rates and broader monetary policy.
But the expectation that a fall in unemployment to 7 per cent would trigger an interest rate rise is now being reviewed after the jobless tally plunged to 7.1 per cent. The Bank did not expect it to hit its target for three years.
Carney believes it is too soon to raise interest rates because the economy is not strong enough.
“If we were to change interest rates, the economy has to have enough momentum to withstand it,” he said.
“There are still a lot of people looking for work, and the excess capacity in firms means there is additional slack.”
Michael Saunders, economist at investment bank Citi, said forward guidance “is in effect dead”, but Carney said: “Not at all. We said we were not thinking of tightening monetary policy until unemployment was at 7 per cent. It has got there faster than we expected. We said we would take stock.
“We have already provided additional guidance and we see no immediate need to change interest rates. We are thinking about how to evolve guidance.”
New guidance is expected to accompany the inflation report on 12 February.