The Bank of England
The Bank of England

The Bank of England’s policy of forward guidance has not been effective in stimulating the pace of recovery, one of its interest rate setters said on Wednesday in the first breach of the central bank’s advocacy of its new monetary policy strategy.

Martin Weale, an external member of the Monetary Policy Committee, said there was little evidence that forward guidance was boosting growth and the rapid fall of unemployment “strengthen[ed] the case for an early rate rise”.

His speech was the first time any MPC member has contradicted BoE governor Mark Carney’s view that forward guidance “makes the exceptionally stimulative monetary stance more effective”.

Since August, the bank’s forward guidance has said that interest rates would remain on hold at least until unemployment falls to 7 per cent, unless inflationary pressures mount. BoE officials have repeated that guidance makes monetary policy more effective and without it, markets would already be expecting interest rate rises.

Using evidence economic models, market moves and surveys, Mr Weale cast doubt on both of the bank’s claims.

On effectiveness, he said he was, “relieved that there was no obvious further impact on expected future [interest] rates from the announcement of the policy in August” as market moves would imply the bank had gone soft on inflation.

Officials have countered that guidance works because it allows people to better understand the way the BoE will react to events, but Mr Weale was not convinced by this argument either.

“If forward guidance has done no more than to codify what people had expected the Monetary Policy Committee to do anyway, then its effects on the profile of expected future rates, and thus on output and inflation, should be expected to be small,” he said.

Mr Weale added that guidance might have an effect on longer-term expectations of slightly lower interest rates, but that was only likely if “people have taken an unusual interest in what my colleagues and I have said about policy”.

The MPC member was even more critical of the governor’s repeated claim, that, “in the absence of forward guidance, the conversation would be – wrongly – about an immediate tightening in monetary policy, an immediate raise in interest rates”.

Dismissing Mr Carney’s view, Mr Weale said, “it seems to me unlikely that market participants believe that, in the absence of forward guidance we would have already raised rates or that they would have expected a rate rise to be imminent.”

Dissent from MPC members used to be commonplace, but has been conspicuous by its absence since Mr Carney’s arrival as governor in July. Mr Weale’s speech reflects a concern on the committee that rapid growth alongside continued poor productivity performance since the summer has brought forward the moment the BoE should be thinking about raising interest rates.

While not revealing how he was planning to vote on the committee, Mr Weale did not fall in behind the governor’s recent mood music in suggesting tweaks to lending conditions for mortgages and other policies could mean interest rates could remain at rock bottom for a long time even with unemployment falling much faster than expected.

He said evidence on inflationary pressure was more important to him in his votes on interest rates than guidance. “I do not want to speculate on when that might happen and limit myself to the obvious point that, other things being equal, good news on underlying inflation reduces the case for tightening while rapid economic growth and, more especially, rapidly falling unemployment strengthens it.”

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Forward guidance is just a nudge in the right direction

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