daily alternative | alternative news - BoE follows in the Fed's footsteps with forward guidance strategy

BoE follows in the Fed’s footsteps with forward guidance strategy

The Monetary Policy Committee’s Inflation Report today has confirmed that, as expected, the committee intends to utilise a strategy of ‘forward guidance’.

Under this strategy, the Bank of England will periodically promise to keep interest rates at a particular level, until certain economic conditions are met. The Committee has emphasised that it intends to maintain the current ‘highly stimulative’ stance of monetary policy until economic slack has been substantially reduced, provided this does not create risks to either price stability or to financial stability.

In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the unemployment rate has fallen to a threshold of 7%, although Governor of the Bank, Mark Carney, noted that this was not a ‘target’ but a reflection on the state of the economy.

The MPC said it would consider further asset purchases while the unemployment rate remains above 7% if it judges that additional monetary stimulus is warranted.  But until the unemployment threshold is reached, and subject to the conditions  below, the MPC intends not to reduce the stock of asset purchases financed by the issuance of central bank reserves and, consistent with that, intends to reinvest the cash flows associated with all maturing gilts held in the Asset Purchase Facility.

The Committee will continue to set the level of Bank Rate and the size of the asset purchase programme each month, taking these criteria into account.  The action taken by the MPC if any of these knockouts were breached would depend upon its assessment at the time as to the appropriate setting of monetary policy in order to fulfil its remit to deliver price stability. There is therefore no presumption that breaching any of these knockouts would lead to an immediate  increase in Bank Rate or sale of assets.

Governor Mark Carney said:

“A renewed recovery is now underway and it appears to be broadening, but the recovery remains weak by historical standards. It’s more improtant than ever for the MPC to be clear and transparent in order to avoid tightening Even under the assumption that the current exceptionally stimulative stance is maintained, the MPC expects GDP growth of 2.4pc in 2 years time, a rate little below historical average.

“This is the slowest recovery output on record. Unemployment still high, 1m more are unemployed than in the financial crisis. We have exceptionally weak productivity, a significant margin of slack in economy, scope for rebound very uncertain Inflation is at 2.9pc and is likely to remain about that level in the near term. Underlying domestic inflationary pressures remain subdued. Even on the assumption that rate remains at current level, inflation will fall back to 2pc a little after the two year horizon.This is an exceptionally challenging environment in which to set monetary policy.”

Jonathan Harris, director of mortgage broker Anderson Harris, says:

“While the Bank is not promising to keep interest rates low for a particular period of time, it expects that rates will not rise above their current level of 0.5 per cent before the third quarter of 2016. This is far more certainty than we have ever had and while it brings no comfort to savers, it will reassure overstretched borrowers who are worried about potential rate rises.

“We expect fixed-rate mortgages to fall even further on the back of this announcement. They may already be at historic lows but if lenders are to convince borrowers to opt for a fix when interest rates are highly unlikely to rise, then pricing needs to be attractive. Borrowers who prefer the certainty of a fixed rate and particularly those looking for something beyond the next three years when it is less certain what will happen with interest rates, should consider a five-year fixed-rate deal.”

 

daily alternative | alternative news – BoE follows in the Fed’s footsteps with forward guidance strategy

via BoE follows in the Fed’s footsteps with forward guidance strategy

Related News

Leave a Reply

COPYRIGHT 2019 © DAILY ALTERNATIVE - ALL RIGHTS RESERVED.

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close