The Bank's new guidance

Mark Carney

Did the Bank of England loosen monetary policy today? Mark Carney would like you to think it has. He would also like you to think that it hasn't.

You might not think that is very helpful. But life is complicated right now for Britain's central bank. All that the Monetary Policy Committee (MPC) is really doing with its new "forward guidance" is sharing more of that complexity with all of us.

Put it another way: they have promised to make the policy trade-offs between growth and inflation more transparent. They have not promised to make those trade-offs go away.

You could see this tension running right through the new governor's big press conference. We were supposed to think that today's move would make the Bank's policy more "effective". But we weren't supposed to conclude that policy had actually changed.

Mr Carney said, in terms, that there has not been a change in the way the Bank would react to improving news about the economy. It was not, to use the jargon, a change in the MPC's "reaction function". The MPC was simply choosing to make that reaction function more explicit.

So, the Bank can have its cake. And it can eat it too.

What does it all mean in practice? That is the question that City economists and investors are now rushing to answer, as they examine the details of the new guidance.

The fairly modest market reaction so far suggests that this is not being seen as a major loosening in future policy - or at least, not any larger than people in the City were already expecting. If anything, the rise in the value of the pound suggests rather the opposite.

You could argue that the details of the guidance mean a slight loosening in the formal approach to the inflation target. After all, the Bank previously targeted 2% inflation 18-36 months ahead.

By contrast, the "knock-out" provision says they won't consider raising the Bank rate, with a 7% plus unemployment rate, unless inflation 18-24 months ahead has a more than 50% chance of being over 2.5%.

Perhaps. But if there is a loosening, it's pretty small. You might also argue, looking at the Bank's recent record on inflation, that the MPC actually loosened its approach to the target quite a while ago. This just makes it explicit.

What's most interesting to me, in today's guidance, is the fine print.

I suggested last week that the "knock-out" provisions about inflation would be the most important. If anything, the three knock-outs are a bit stronger than I might have expected, and suggest that the "hawks" on the MPC needed quite a lot of reassurance to sign up.

Looking at the Bank's latest forecasts, it wouldn't take much for the inflation forecast 18-24 months from now to go above 2.5%.

It's perfectly possible that the 7% unemployment threshold will also be breached, well before 2016.

But, if productivity - output per head - recovers along with the economy, we might also see the unemployment rate stay above 7% well into 2017, even with quite strong growth in national output.

In that case, the MPC might have to raise the Bank rate, to meet the inflation target, well before their new unemployment test has been reached. Or it might not. It would all depend on what that rise in productivity was doing to the economy's long-term potential.

You might find all these "mights" and "might nots" rather unsatisfying. Not to say mealy-mouthed. But as Mark Carney said himself, part of the point of the guidance is to give the MPC more scope to keep policy loose, while these supply side uncertainties are resolved. (I went into this argument in greater depth a few weeks ago.)

To return to where I began: the Bank's new guidance makes the difficult trade-offs now facing the MPC more explicit. It does not make them go away.

If there was news from today's press conference it was this; the Bank of England's policy makers are not cracking out the champagne at the UK returning to its long-term average growth rate of roughly 2.5% a year. They want more, and they are going to try quite hard to get it.

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

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  • rate this

    Comment number 244.

    I think we have guidance from the Vatican bankers

  • rate this

    Comment number 243.


    Houses for your parents. The CGT situation changes over time, but it used to be the case that you were exempt from CGT if a close relative, like a parent was living in the house. (It isn't now!)

    Your only way to exploit the situation is get a real divorce to get two houses exempt of cgt. That still works. You do need a cooperative spouse of course. Now, if you have multiple wives...

  • rate this

    Comment number 242.

    233.MUFFIN007 "retirees blasted again!"

    Not public sector retirees. No blasting for them. Only private sector retirees are blasted. They rely on savings interest (inflation high so savings are destroyed) or they buy annuities (interest rates low so annuities are destroyed). Meanwhile public sector pensions are inflation proof at half or two thirds final salary for ever. It's part of the plan.

  • rate this

    Comment number 241.

    High interest rates and a house crash would be the first step to recovery.
    Owners of empty houses and flet's should be taxed so they have to rent/sell out.
    Successfully business sit anyway in the moment on mountains of cash and need not low interest rates, the rest should anyway be closed down as they are not efficient and profitable.

  • rate this

    Comment number 240.

    Is the new governors forward guidance not just plain common sense or am I missing something,

    If inflation, FX Rates, Unemployment or Balance of Trade are causing problems then change the base rates.

    When are we likely to see some innovative new instruments or policies that will allow an effective and measured control of the money supply and credit.

    Base rates are far too blunt and instrument

  • rate this

    Comment number 239.

    No233 Muff,
    'what an awful country to live in'
    Nearly the whole of the world's economy has been captured by the rich and powerful aided and abetted by having politicians in their pockets. There are twice as many 'banking lobbyists' in Washington than members of Congress.
    Only the destruction of neoliberalism will provide the opportunity for a decent political/economic system.

  • rate this

    Comment number 238.

    For instance, you pay £150k for a house, you sell it 10 years later for £200k. Meanwhile you've spent £30k on interiors and keeping it maintained.You've also spent £15k on mortgage interest payment. CGT you would be able to claim the £45k back as its directly relating to the increase in value.So more tax inspectors, more jobs for accountants and more paperwork.Brilliant.

  • rate this

    Comment number 237.

    The government needed a reason with no explanation to keep interest low to protect all the greedy bankers and irresponsible lifestyle borrowers and have smokescreen to get the borrowing on paper down. You pay 800.000 to in reality average men who comes up with a great idea. link interest with unemployment figures ( the most rigged figures in the game) and win the next election. Great strategy!

  • rate this

    Comment number 236.

    Except of course if you own your parents house then its a second house and is liable for CGT, if you buy it for them and its in their name then its liable for inheritance tax when they pass away. And technically if you buy it for them then its gift and you are liable to pay tax on it if you're caught. CGT on first homes is crazy and would cost a fortune to run.

  • rate this

    Comment number 235.

    #227 The politics of CGT on main house are complex. If you ditch stamp duty and replace with CGT it would not impact on price of first house someone bought but only when they wanted to move up the property ladder. I can forsee some very odd economic effects on house prices.

    Better would be to abolish all the silly govt schemes to subsidise mortgages and get interest rates raised

  • rate this

    Comment number 234.

    Jesus Saves but Abraham Invests.

  • rate this

    Comment number 233.

    Savers and retirees blasted again! Is there no end to this. A person with say £5000 life savings gets about £25 interest per annum before tax when inflation reduces its value by £150 after tax. Couples earning £200,000 with a £500,000 are being subsidised by the poor pensioner. What an awful country to live in.

  • rate this

    Comment number 232.

    without orders firms will not borrow to invest
    regardless of low interest rates
    and savers spending power is hit
    fiscal stimulus is more effective than monetary stimulus
    govts can fill the spending gap
    either directly on vital infrastructure
    like keeping the lights on sustainably
    or through tax cuts (NI holiday)
    to allow households to spend more
    need a much lower target for unemployment too

  • rate this

    Comment number 231.

    @226. Greggers

    "investments aren't so attractive because of the risks involved."

    Invest in banks then. There's no risks at all. If they go pear shaped they are rescued at the expense of the ordinary person on the street. No risk whatsoever involved. They get money at 0.5% lend it at 4% +++ legalised theft dressed up as business. You can't go wrong!

  • rate this

    Comment number 230.

    " if you have lost your job and income and therefore have to live off your savings, investments aren't so attractive because of the risks involved."

    That is a fair point. But I would add that if you cant find work your best interests are for business to have the stable environment (i.e. interest rates low for 3 years) where they can grow and create new jobs.

  • rate this

    Comment number 229.

    Any interest rate rise will cause a massive increase in repossions, which will in turn cause a house crash.

    Good. Exactly what we need. High rates, low house prices. Yes getting there will be painful for a very few.

    Very few? Just under 9 million in fact. The cost to the welfare state of re-housing 9 million families? Expect taxes to rise a minimum of 50% to cover that bill.

  • rate this

    Comment number 228.

    George : Are the banks OK ?

    Mark : Yes but they need more long term help....

    George : Ok cook up some more schemes to help them.

    Mark : Will we get away with it ?

    George : We have up to now...

  • rate this

    Comment number 227.

    There is another tax efficient way to invest in houses...

    Divorce the spouse..

    Then you get two houses tax free (and can still live together - just don't re-marry/civil partnership)

    It used to be a good scam to buy a house for your parents to live in - best of all buy two houses if you can persuade them to divorce!

    What's not to like about the UK Tax system!

    The CGT exemption must GO!

  • rate this

    Comment number 226.


    If you are working and have a steady income and can continue to save then I agree with you that using some of your savings for investments is much better than putting it in a bank account. However, if you have lost your job and income and therefore have to live off your savings, investments aren't so attractive because of the risks involved.

  • rate this

    Comment number 225.

    Have you heard of the Single Market Agreement signed by the 'Grantham Spam Hoarder'?
    Don't be so ridiculous.


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