Bank of England policymaker Martin Weale has broken ranks with governor Mark Carney by expressing doubts about the effectiveness of forward guidance policy on encouraging economic growth.
Weale, a member of the central bank’s nine-strong monetary policy committee (MPC), said the low-interest rate stimulus provided to the economy by forward guidance was “almost certainly very small”.
His remarks appear at odds with those of Carney, who has said the policy “reinforced the recovery”.
Forward guidance, introduced in the summer, is a pledge by the MPC not to push interest rates above their current historic low of 0.5 per cent before unemployment falls to a threshold of 7 per cent – subject to inflation remaining under control. It is designed to give households and businesses the confidence to borrow. But critics say it has backfired because signs that the jobless rate is falling more quickly than expected has fed through to a higher cost of borrowing on money markets, increasing the cost of some lending in the real economy.
Weale was the only member of the MPC to vote against the policy announced in August – with minutes of the meeting revealing that while he backed the idea, he wanted to see a tighter safeguard against inflation built into it.
In a speech in London yesterday, Weale, pictured below, said his own assessment showed the policy had eased uncertainty about the path of near-term interest rates.
“This decline in uncertainty probably provides some stimulus to the economy but the effect is almost certainly very small,” he added.
Weale said that, in theory, the effect of forward guidance should be “powerful” provided it leads to a marked change on the view of future interest rates.
But he added that it was “inconceivable” that without forward guidance, the MPC would already have voted to lift interest rates and that the only thing that had stopped them was forward guidance. “If forward guidance has done no more than to codify what people had expected the monetary policy committee to do anyway, then its effects on the profile of expected future rates, and thus on output and inflation, should be expected to be small.”
Carney has stressed that the forward guidance is a threshold for considering a rate rise, not a trigger to enact one, adding that the beneficial effects of keeping it low for longer will also be weighed.
But Weale said in his speech that, should unemployment in the UK be falling rapidly to reach 7 per cent, it would strengthen the case for an early rate rise.
The MPC member also noted that the rise in inflation expectations since August might be a knee-jerk reaction to higher energy bills but would be concerning if persistent.
“I am concerned that those measures have gone up since August… they haven’t yet risen to an extent that I would regard as significant.”