A bit of guidance from the Bank
- 4 July 2013
- From the section Business
If this is what happens when Mark Carney doesn't do anything to UK monetary policy, we can only wonder at the impact he might have in the future.
Though the Monetary Policy Committee (MPC) decided to keep policy unchanged today, it also decided to tell the financial markets that they were wrong about the likely timing of any future rate rise. Like magic, the pound has fallen sharply on the news. Long-term interest rates - the yields on UK government debt - are also edging down, though perhaps not as much as some on the MPC might have hoped.
"No change" in policy usually means no statement either - or not much of one. But you could say the content of today's statement marked a change of policy on its own.
Recent economic news, that statement said, was consistent with the Bank's forecasts for inflation. Those forecasts, incidentally, see inflation falling back to the 2% target within two years, on an assumption that bank rate does not go up until 2016. But, "the significant upward movement in market interest rates would… weigh on that outlook; in the Committee's view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy".
In case anyone failed to get the hint, the next paragraph reminds us that the chancellor has asked the MPC to explore the possibility for just such forward guidance in time for their August meeting.
Is this a game-changer? It depends on your definition. The published minutes of the June meeting had already noted that the turbulence in the bond markets had led the financial markets to expect a rate rise "around nine months earlier" than in the Bank's May Inflation Report. (Intriguingly, the minutes also said these market events "had demonstrated the sensitivity of financial markets to changes in policy expectations", and said that "some", who had voted no to more quantitative easing in June thought that "those events illustrated the likely effectiveness of asset purchases should they be needed in the future".)
You might say it's a small step from there to saying that those higher market expectations are wrong. But today's statement suggests that the MPC thinks the recent jump in long-term interest rates has left room for forward guidance to change financial market expectations, and, by extension, the future path of the real economy (see my Monday post for more on this)
Arguably, the MPC has gone one step further than that in its statement; not only has it identified room for forward guidance to change things, but it's chosen to explore some of that room right now in suggesting that forward rates are out of whack.
How will Governor Carney build on this outbreak of transparency next month? We will wait to see, though the FT's economics editor, Chris Giles, provides a useful guide to some of the options in today's FT.
In the meantime, Howard Archer at IHS Global Insight tells us that "all eyes will now be on the minutes of the July MPC meeting, with the million dollar question being how did Mark Carney vote on Quantitative Easing?" That is indeed the question of the day. Though looking at Mr Carney's pay package you'd have to conclude his vote is worth somewhat more than that - even after the tumble in the pound.