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What the analysts say:
City analysts are also intruiged about the prospect of forward guidance from the Bank of England.
Kit Juckes of Societe Generale cautions about not getting carried away:
BOE Governor Mark Carney’s success with forward guidance in Canada is part of his CV, but ‘reaching over the heads of markets’ and telling the people of the UK that rates will stay low for a long time, won’t have so much effect.
Rate expectations are already low. As for markets, the biggest effect may be on inflation expectations.
Jane Foley of Rabobank reckons that Carney will not nail the Bank’s trousers to an explicit target, such as the unemployment rate:
Our expectation is that forward guidance used by the Bank will be simple and not tied to the performance of a particular economic variable.
Speculation that the MPC could commit to maintain accommodative policy settings until a certain economic threshold has been reached appears to be based on the Federal Reserve’s current focus on the unemployment rate. However, the Fed has had a mandate to target employment for years, the BoE has not.
Barclays economist Simon Hayes agrees that the Bank may not ignite many monetary firecrackers today:
This [guidance] may not constitute the ‘shock and awe’ monetary activism that came to be expected from Governor Carney when he was first appointed, but the improved economic circumstances have reduced the need for emergency support.
Robert Wood of Berenberg Bank says the goal is to keep borrowing costs stable while the UK economy picks up speed:
The recovery could quickly lose steam if mortgage rates rise, so the BoE’s job now is to use guidance to ensure that the stimulus is not withdrawn prematurely.
And economist Shaun Richards writes that Carney shouldn’t overestimate his own abilities:
The fundamental problem with moving towards a type of command economy approach which forward guidance represents is the implication that the future is in some way known. I have written before of the way that this mimics in some respects the themes of the God Emperor of Dune but forgets that Leto II was prescient and could see at least some of the future.
If there is one lesson that the credit crunch has taught us it is that central bankers are by no means prescient. Otherwise how did we get here?
Forward guidance: What the media say
The UK media are awash with speculation about today’s Quarterly Inflation report, and the first chance to see Mark Carney at a UK press conference.
The Financial Times points out that some senior members of the Bank aren’t as keen on the idea of pledging low interest rates as Carney himself:
It is Mark Carney’s big idea to lift the UK economy out of the doldrums and into what he has termed “escape velocity”. Others interpret this as a self-sustaining recovery.
However, while Mr Carney’s a fan of guidance, the rest of the MPC might take some convincing. Four of the current membership, including deputy governor Charlie Bean and chief economist Spencer Dale, have spoken out against forward guidance in the past.
FT: Forward guidance, BoE style: five questions
Reuters reminds us that Carney was an early pioneer of forward guidance:
As central bank chief in his native Canada in 2009, he took what was then the unusual step of committing to putting interest rates on ice for more than a year during the worst of the crisis.
The task looks a lot more complicated in London.
Reuters: Carney’s Bank of England set to join forward guidance club
Sky News agrees that this is the most significant changes to the way the Bank conducts monetary policy since it was granted independence in 1997.
Economists say the bank may pledge to leave rates unchanged until the unemployment rate drops beneath a certain threshold.
Allan Monks of JP Morgan said he expected that level to be 7%, but added that the main message will be “that rates are unlikely to rise for the next two years or more – despite the better signs on growth”.
Sky: Bank Of England To Unveil Monetary Policy Shift
The BBC reports that the financial markets could be cheered by today’s guidance:
Adrian Lowcock, at the stockbrokers Hargreaves Lansdown, said that markets could jump higher if the Bank’s announcement on Wednesday “hits the right notes”.
“We could see UK shares rally and the FTSE may very well reach an all-time high,” he said.
BBC: Bank of England set to unveil ‘forward guidance’
While in the Telegraph, Allister Heath takes a contrary view – arguing that the Bank of England should be tightening monetary policy, not promising to keep it ultra-loose:
Upping rates by a quarter or even half a per cent, for starters, would send shockwaves around the world. It would reinforce the Bank’s commitment to controlling inflation and that it believes that the worst of the crisis is behind us.
It would boost confidence in the recovery, confirm that the process of normalisation has begun and act as a warning to still over-leveraged firms and families that this is the last chance for them to get their act together.
Telegraph: Mark Carney is about to make his first mistake – not raising interest rates
Updated
Forward Guidance day at the Bank of England – at 10.30am
Good morning.
Mark Carney has made a pretty sure-footed start since replacing Sir Mervyn King as Bank of England governor five weeks ago. Today, the central banker from Canada faces his first big test – ushering Britain into a new world of Forward Guidance.
For the first time in its history, the Bank will lay out how long it will leave UK interest rates at their current record low levels.
Economists believe the BoE could pledge not to touch borrowing costs until unemployment had fallen to a certain level, or until the UK has racked up more growth. Or perhaps for a fixed period of time.
The move gives Carney and crew an extra weapon in their monetary policy armory – and with rates down at 0.5% and £375bn of quantitative easing already deployed (to buy UK government debt), they could use it.
As Vicky Redwood of Capital Economics explains:
Guidance could play an important role in the coming months if it keeps rate expectations anchored as the recovery picks up pace.
The details will come at Carney’s first press conference, for the Bank’s Quarterly Inflation Report, in which UK growth forecasts are likely to be raised…
…And that makes today’s task rather trickier that it appeared back in March when chancellor George Osborne invited the BoE to consider forward guidance. Then, Britain feared a triple-dip recession. Now, it knows that the double-dip never happened.
The economy is still smaller than in 2008, but we’ve seen plenty of encouraging private sector data in recent days – including the best month for service sector activity since 2006, and a jump in industrial output.
With some newspapers (not this one) even claiming that Britain is “booming”, should the Bank really be promising to keep the party going?
@DuncanWeldon No idea what you're referring to. pic.twitter.com/FLFfasxlCN
— Jeremy Cliffe (@JeremyCliffe) August 6, 2013
However, with real wages falling and living standards squeezed, Carney can certainly argue that the UK economy needs all the help it can get.
The quarterly inflation report is released at 10.30am BST, immediately followed by a press conference inside the Bank where a flock of Britain’s economics journalists will quiz Carney about his plans.
I’ll track all the action in the liveblog — along with other events across the financial markets, the world economy, and the eurozone. It’s an otherwise quiet day, though, so Carney gets the limelight.
Updated
Source: Bank of England to deliver forward guidance - live
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