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Forward Guidance "Mark 2" from Carney

Wednesday, Feb 12, 2014 - 02:45

Feb.12 - The morning after Janet Yellen gives her first comments on her outlook as the new Fed chair, Bank of England Governor Mark Carney has also adapted his 'forward guidance'. Joanna Partridge takes a critical look at what those guidance policies mean and whether they're working.

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These days, they're the words on every central banker's lips. Or rather - it's the reason why they're saying what they're saying. Forward guidance. It's a tool adopted by central banks - so that along with their forecasts they can influence market expectations of what might happen to interest rates and how monetary policy will look in future. It was introduced by Ben Bernanke, the then-chairman of the Federal Reserve in late 2012. Mario Draghi debuted it at the European Central Bank in July last year. Then in August the man from Canada brought the same initiative to the Bank of England when he became governor. Mark Carney got the Bank's other policymakers to make an unprecedented pledge interest rates would stay at record lows until unemployment fell to 7%, predicting that would take 3 years. But events have overtaken them and barely six months later, joblessness stands at 7.1%. Despite this, Carney defended the BoE's plan on Wednesday. SOUNDBITE: Mark Carney, Governor, Bank of England, saying (English): "Forward guidance is working. Expected interest rates have remained low even as the economy has recovered strongly, uncertainty about interest rates has fallen, and most importantly, UK businesses have understood the message." The unexpectedly fast fall in unemployment, and having to revise up its growth figures for the next 3 years, has put Carney and the Bank in a difficult, and embarrassing, position. Danny Gabay is from financial advisers Fathom Consulting. SOUNDBITE: Danny Gabay, Co-Director, Fathom Consulting, saying (English): "If you set a target, a benchmark and you breach it straightaway you have to explain why you've changed your mind or what you're going to do in that circumstance." Say hello to the "second phase" of forward guidance, being jokily referred to as "Mark 2". SOUNDBITE: Mark Carney, Governor, Bank of England, saying (English): "So the question is, what's next?" The Bank now intends to monitor a broad range of economic indicators including unemployment, business surveys and the number of hours worked as it decides when to raise rates. Carney hinted at a rise in 2015. Alastair McCaig is from IG. SOUNDBITE: Alastair McCaig, Market Analyst, IG, saying (English): "The last thing he wants to do is box himself into a corner and where at all possible I'm sure he'll to keep things on the hazy side rather than making some hard lines for him to fall back against." As for the U.S., the unemployment rate is still the hinge for its forward guidance under new Fed chair Janet Yellen. What does all this mean for forward guidance? Even if the economic recovery doesn't proceed as expected, and central bankers have to adapt their guidance - they're likely to stick with it in some form or other in an attempt to protect fragile growth. But they'll have their work cut out stopping markets from pricing in rate rises, before they happen.

Forward Guidance "Mark 2" from Carney

Wednesday, Feb 12, 2014 - 02:45

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