Carney makes headlines with unusual forward guidance
Bank of England Governor Mark Carney made headlines Wednesday with a gutsy announcement regarding monetary policy. As a vocal supporter of forward guidance, Carney outlined an unconventional approach to managing the market’s expectations. Following the release of the Bank of England Quarterly Inflation Report, Carney announced the central bank would keep interest rates at record lows until unemployment falls to 7 percent.
In an effort to stimulate consumption and economic growth, Carney’s new policy reassures market participants interest rates will remain at record lows for the foreseeable future. This means investors and households can borrow more and save less without worrying about a sudden interest rate hike. The Bank of England will likely keep its benchmark rate at 0.5 percent until mid-2016, when unemployment is expected to reach its target.
UK unemployment has been stuck at 7.8 percent for several months, a figure expected to persist despite stronger-than-expected employment data in June. Britain’s June claimant count declined more than 21,000, beating expectations by almost three times.
Carney’s decision to tie inflation expectations to employment is perhaps bolder than US Fed Chairman Ben Bernanke’s decision to do the same in the US following the 2008 financial crisis. Unlike the Fed, which has a dual mandate of achieving price stability and maximum employment, the BoE’s only objective is to keep inflation at bay. The BoE justified the decision to tie inflation expectations to the unemployment rate by adopting an approach consistent with key government policies, chief among them being employment growth.
Mark Carney assumed his post as Governor of the Bank of England in July amid wide speculation and heavy expectation from the markets. Wednesday’s unconventional forward guidance was Carney’s first major shakeup as Governor. However, the new policy decision will have its fair share of retractors. Currently in the midst of a £375 billion asset purchase facility, the UK has thus far failed to achieve success employing unconventional monetary policy.
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