The Bank's search for guidance (cont'd)


In the short time that Britain's central bank has been given to think about using "forward guidance" to support the recovery, the recovery has started to look much less in need of extra support.

That has left the Monetary Policy Committee (MPC) facing something of a quandary.

You could say the Bank's policymakers have gone in for bucketloads of forward guidance since 1993, in the form of the Quarterly Inflation Report.

But people have tended to assume governor Mark Carney's forward guidance will be completely different from anything that has gone before, and excitingly extra. They have also tended to equate it with looser policy.

A majority on the MPC were against loosening, even before the recent improvement in the economy. You might then wonder why we were still having a discussion about guidance at all.


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If there's any forward guidance next week from the MPC, the big question to ask will be: 'Have they told us anything we didn't already know?' ”

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But we know from the minutes of last month's meeting that even so-called "hawks" on the MPC don't want credit conditions to tighten too quickly, as a result of the US central bank and/or changing expectations in the financial markets.

That provides a defensive motivation for guidance, even among those who do not want the path to the first rate rise to be any longer than it is now. (See The MPC's search for guidance for more on this.)

So assume, for the sake of argument, that a majority says yes to guidance of some form. What might it look like? This gets us into the exciting (!) question of thresholds.

To add real economic content to the MPC's guidance, the ideal "threshold" would be a measure of spare capacity that's both reliable and widely understood.

The MPC could then say it won't raise rates until X amount of that spare capacity has been used up.

Unfortunately there's no such measure. The concept of spare capacity is contentious and hard to measure - even in theory. In practice it can't be pinned down with any certainty at all.

What, then?

It's also important that the chosen variable is independent of the Bank, not the result of a complex model that the MPC can easily change.

Cash GDP - the amount of spending in the economy - would at least meet that last test. But it's frequently revised and not widely understood. That leaves unemployment.

If I had to guess, I would say the committee will be voting on Thursday on whether to say something like: "The MPC does not plan to raise bank rates or lower the stock of assets held under the Bank's asset purchase scheme as long as the UK unemployment remains higher than X per cent, and the inflation forecast Y years ahead is within Z percentage points of the Bank's 2% target."

The MPC has already had more than half a dozen meetings to nail down the specifics. Nothing will finally be decided until Thursday's vote, but - at a bare minimum - you'd expect guidance that implies that rates will not be raised until 2016.

So if there's going to be an unemployment rate mentioned, it needs to be one that the MPC expects the UK to reach comfortably before the end of 2015.

Pick a number

What might that number be?

Well, unemployment stands at 7.8% of the active workforce. The Office for Budget Responsibility reckons the "natural" rate of unemployment is 5.4%, though the OECD thinks the rate consistent with stable or falling inflation is higher, more like 6.1%. (I hope to say more about the recent evidence on this in a future post.)

It's probably a safe bet that any unemployment threshold the MPC chooses will be well above both those; maybe in the region of 7%.

But whichever number the MPC selects - if it selects one at all - Mr Carney will be keen to clarify that it is indeed a threshold, and not a trigger. The idea is that rates will not rise before that level is reached, not that they will necessarily go up when it is.

And yet the more I think about it, the more I think the really crucial debate isn't around the value of X - but Y and Z, in the part about inflation.


Why? Because the unemployment number only tells you something about the way the MPC is going to judge the recovery.

It's the stuff about still keeping an eye on inflation that will really signal whether the MPC is planning to be more focused on growth in the next few years than the financial markets might otherwise have expected.

All of which takes me back to that thorny question: whether Mr Carney's shiny new guidance needs to be expansionary to be worth doing.

As I mentioned in my earlier post, there are arguments against central banks being super-transparent. But thanks to the US central bank governor, Ben Bernanke, they couldn't be less fashionable. You won't find many on the MPC loudly defending the freedom to be opaque.

The more important objection to the weaker forms of guidance, if it is an objection, is that the Bank is pretty transparent already, and offers reams of forward guidance in its Quarterly Inflation Reports.

That is why the MPC signs off on those reports: they represent the views of the MPC, not Bank of England staff. They both explain the Bank's policy and - often - help to supplement it, by telegraphing the Bank's intentions to investors in the markets and everyone else.

In the midst of political scandals, US journalists ask: "What did they know and when did they know it?"

If there's any forward guidance next week from the MPC, the big question to ask will be: "Have they told us anything we didn't already know?"

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

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  • rate this

    Comment number 117.


    This is why I am so disappointed with Harvard's teaching of economics in recent years. (& not only Harvard!)

    They got wrapped up in their own theories & speculations & these became 'facts' of economics only to be proved wrong so disastrously.

    I am ashamed that one of my ancestors helped found the place! But it was ages ago so I don't fell I should take any share of the blame!

  • rate this

    Comment number 116.

    Repeat of the "Mistakes of the 1920s"

    There is something in that argument, but really we are talking about education and agendas and how the sociology of group-think influences what is and what is not an acceptable theory in economics over time.

    Basically the idiots forgot the lessons of history. Their hubris caused the crash and this depression. It will take 2 decades to change!

  • rate this

    Comment number 115.


    The PURPOSE of the 400 ch limit is to PREVENT us from displaying our understanding and erudition! We were showing up the BBC's own staff when we had no limit.

    Some of the discourse was quite learned & well informed, but the BBC wants to reduce everything to just sound bites. (& of course to save money on moderators.)

    The limit came in when Lord Patten became Chairman! (Coincidence?)

  • rate this

    Comment number 114.


    Houses only do not have to be sold on the death of the owner if there is one beneficiary, if there are more than one then the house has to be sold. So you are wrong to say that they do not need to be sold on death of the owner.

    This mechanism is a very slow one to correct a housing bubble as it was in the 1870 Long Depression - that is why the present crash will take ages to correct.

  • rate this

    Comment number 113.

    110. alan

    There is an infinite upside on house prises are they are in chronic under supply - the only limiting factor is the supply of affordable credit - if you do not grasp this then you don't understand why lowering interest rates pushes up house prices. If you don't understand this then housing bubbles must be totally beyond your grasp.

  • rate this

    Comment number 112.

    Probably the only thing on which JohnFromHendon and I agree is that it is impossible to sensibly discuss anything in 400 chars.

  • rate this

    Comment number 111.

    110 Alan
    of course you are correct that supply and demand together determine prices, but if one is pretty well fixed (as with houses unless planning regs change) then changes in the other can move prices. Except that in the case of houses they do not have to be sold, not even if the owner dies. If demand were to drop many people would just stay put rather than 'lose money'.

  • rate this

    Comment number 110.

    104 Wiltshire Lad and 109 John from Hendon
    Prices are determined by the interaction of supply AND demand; not one or the other but both.
    Basic economics as any O level economics student will tell you.
    To reduce prices increase supply AND dampen demand.
    Real house prices have fallen by 25% in many parts of the UK since 2007 due to reduced demand and many houses being on the market.

  • rate this

    Comment number 109.

    104.WL "way to reduce (house) prices is to increase supply"

    Not true.

    The ability to sell requires a supply of affordable mortgages for say 60% of the price at some point in the chain.

    There is one circumstance where there are forced sellers of houses & that is when the property has to be sold on death of the owner. (This is why property bubbles take so long to collapse - see 1870 Depression.)

  • rate this

    Comment number 108.

    Here's my guidance to BoE &UKgov:

    Do everything to get the UK manufacturing and selling. And, when, you buy, look at the big picure on costs and buy a UK product.

  • rate this

    Comment number 107.

    Does it ever occur to economists that the economic performance of a nation will happen in spite of their meddling & not because of it?
    Does it ever occur to politicians that business & GDP of some sort or other in the nation will always go on in spite of their meddling & not because of it?

  • rate this

    Comment number 106.

    True - Thatchers switch to indirects w/cuts to IT rates laid foundation but the factors you dismiss were there, too. Reckless banking was not necessarily by bankers, btw. Mortgage brokers were doing it as were the (ex-) Building Societies.

    We're nearly at 6th anniv. of NRBS. Locals in the n-east knew that some sub-primes had been granted & that local knowledge started run on NRBS in '07.

  • rate this

    Comment number 105.

    I would think that every house built, originally spoilt someone's view. If I live in a house, that originally spoilt someone's view, then I should not complain about new houses spoiling my view. If I have any children and don't expect them to live with me forever, then I should not object when new houses are being built.

  • rate this

    Comment number 104.

    but in reality, if many people cannot get a mortgage for the required amount, they will not be able to move and the market will be ossified.

    The only way to reduce prices (if you think this is a good idea because you do not own a house) is to increase supply enormously.

  • rate this

    Comment number 103.

    The BoE or one of the new regulators is going to enforce 3 times income! House prices will fall!

    by reducing demand!

  • rate this

    Comment number 102.

    This dog of an incompetent govt is addicted to DEBT, added £600bn in only 38 months - a record! Now it is encouraging individuals with its Mortgage subsidy scheme to put their necks in the noose as well. Building up DEBT for future generations, and abusing the QE option by raiding the interest to try and close the deficit Gideon has created. Highest level of stupidity!

  • rate this

    Comment number 101.

    98. Disagree. T&C Act is a millstone. Speculative hoarding is ltd to mkts where supply is fixed, or as good as. UK planning system so restricts land availability for building that developers choose strategy (also they need to forward plan & other reasons but…). If you want to discourage this you free up system. Only 8% of Engalnd’s land mass is developed (incl roads etc). Hardly over crowded.

  • rate this

    Comment number 100.

    96 stanilic
    We should be able to service our national debt given low interest rates and our ability to print money.
    The problem arises when interest rates rise. A doubling of rates - which is a question of when not if - could result in interest payments of about £100b a year, similar to expenditure on the NHS.
    We need to continue to cut back and hit education and health.
    Sad but true.

  • rate this

    Comment number 99.

    97 While it's true only the Congress can pass bills and the President can sign them into law which is what happened in 1999, it was with overwhelming support from well respected economists like Alan Greenspan, Bernanke, Geitner, and the whole financial industry. Then trillions in secure govt (FDIC and FSLIC) guaranteed accounts were gambled away in the biggest scam in history, CMOs, CDOs, CDSs.

  • rate this

    Comment number 98.

    84 MT Wallet
    I strongly agree. One of our great successes had been town and country planning. We are one of the most densely populated countries in the world and we have protected and enhanced our environment.The last thing we want is a free for all like Ireland and the USA.
    Many developers are "storing" housing land and they need to be "encouraged" to build rather than speculate.


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