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Carney defends forward guidance, says economic growth isn’t stellar

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Carney defends forward guidance, says economic growth isn’t stellar

Mark Carney wasted little time making headlines as new Governor of the Bank of England. A mere one month after his appointment, Carney took a page out of Ben Bernanke’s playbook by introducing forward guidance into British macroeconomic policy. Carney’s policy builds on expectations by tying interest rates to the unemployment level. The BoE’s policy promises to keep interest rates at record lows until unemployment falls to 7 percent, which according to the BoE, will occur sometime in 2016.

Carney was on the defensive this week against a backdrop of criticism from economists who claim growth is occurring faster than the central bank’s forecast. These economists believe the unemployment rate will drop to 7 percent as early as 2015, thereby negating any assurance the BoE is trying to provide. On Wednesday Carney delivered a speech to a business group in Nottingham, England, where he proclaimed the economy isn’t growing as quickly as many believe.

According to Carney, growth prospects are “solid, not stellar.” The central bank expects growth to occur at an annualized rate of between 2 and 2.5 percent each year over the next three years, which is below the historical average of 2.75 percent. Talks of unemployment falling faster than expected are welcome, since this is one of the ultimate objectives of monetary policy. However, Carney reiterated monetary policy is built on expectation, not hope, and that he doesn’t expect the unemployment rate to reach 7 percent before 2016. Even if unemployment reaches its target sooner, interest rates could be left unchanged. The unemployment target is a threshold for assessing the economy, not a trigger point for higher lending rates, according to Carney.

The central bank chief went on to say the likelihood of unemployment falling faster than expected is around 30 percent, enough to keep the BoE’s current forecast intact.

Carney’s decision to hold his first speech in Nottingham is no accident. The city, which lies 200 km north of London, was among the hardest hit by the recession. The former industrial centre struggles with an unemployment rate well above the national average.

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