Forward Guidance – Carney and the Select Committee

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This morning Mark Carney was in front of the Treasury Select Committee to answer questions on the latest Inflation Report and Forward Guidance. Here's a quick summary of the key discussion points:

1. Is Forward Guidance Good for Growth?

Carney's view was that Forward Guidance was supporting growth, arguing that it made monetary policy clearer and therefore more effective.This seems to be the case, in the Bank's quarterly survey of households' inflation expectations following the announcement they found:

The treasury select committee expressed some concern that long-term interest rates had risen as a result of the Forward Guidance policy, as this might hit complanies looking to take out long term loans. Carney said he knew this might happen, but said that about the majority of loans that were important for short term growth were linked to the Bank Rate.

2. Does Forward Guidance risk too much inflation?

Although the Forward Guidance implies that rates won't rise until ILO unemployment falls to 7%, there are caveats in case inflation starts to pick up. In fact, there are three “knock outs” with regard to inflation, which could cause the committee to reconsider interest rates.

The first “knock out” comes into play if: "In the MPC's view CPI inflation will be more than 0.5 percentage points above or below the target in 18-24 months' time".

There was some discussion about whether this was a reasonable knock out – it was raised that the MPC's forecasts had underestimated inflation in 29 out of 32 quarters – but MPC members explained that this was why the other two knock out clauses were in place (see our previous blog for more information on these).

And while the MPC's forecasts may have underestimated inflation in the past, their current forecasts are not out of kilter with others. The highest forecast in the Treasury's compilation is for CPI to be at 2.8% (Schroders) in 2015. The average forecast is 2.2%.

In addition, Carney argued that inflation expectations actually came down after Forward Guidance was announced. The Bank's survey found the following:

3. Where next for the UK economy?

Carney said that we had seen some welcome improvement in the UK economy but that the early momentum would need reinforcing. “We have a recovery and recent data is consistent with some strengthening and broadening of this. But it is early days.”


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