What is now called the first phase of forward guidance, linking changes in interest rates to an unemployment threshold, was supposed to last for three years. Now it has been buried after six months. I have followed the twists and turns of monetary policy in the UK for a very long time, but this was a short-lived experiment by any standards.
The rapid drop in the unemployment rate to 7.1% has rendered phase one obsolete. Its replacement, using vaguer measures of spare capacity to offer guidance on interest rates, has been interpreted by some as a return to the pre-Mark Carney days of simply targeting inflation and taking one meeting at a time.
It is not that, though it is also a long way from the straightforward forward guidance the Bank of Engalnd governor had in mind. It implies that interest rates will go up at some stage, though not this year, and when they do we should look for rates of 2%-3% rather than pre-crisis norms.
Other interesting features:
- The Bank does not expect spare capacity to be used up over the next three years but will probably raise rates before it is.
- Quantitative easing (QE) will not be reversed and the coupons will continue to be reinvested in further gilt purchases until after Bank rate has begun to rise.
An interesting moment. The inflation report is here.