Interest rate guidance is a flop, says economist
THE Bank of England's new policy of giving forward guidance on interest rates isn't quelling expectations that a hike is likely sooner, rather than later.
That's the view of investment management company Brewin Dolphin which said governor Mark Carney's strategy, along with similar ploys adopted by the US Federal Reserve and European Central Bank, doesn't hoodwink markets.
"Policy makers' attempts to boost the economy by forward guidance is failing," economist Guy Foster said, pointing to evidence from bond markets which suggest earlier rate rises are expected than those laid out by the various central banks.
Giving a presentation on the state of the world economy at Brewin Dophin's Belfast office, Mr Foster said US economic outlook is positive, the European economy is stabilising, and China, the world's second biggest economy is stable but starting to slow.
He was speaking on the same day Mr Carney, who moved to the top post in the UK central bank from the Bank of Canada in July this year, was forced to defend his forward guidance strategy.
Speaking in front of the Treasury Select Committee, he said the strategy – of pledging not to raise UK interest rates from the current all-time low of 0.5% until unemployment dropped to 7% – had "reinforced the recovery".
The Bank expects the fall in unemployment to take around three years, but sterling and the cost of government borrowing have risen sharply in recent weeks as markets expect the jobless total to fall more sharply.
Mr Carney also said the Bank remains "vigilant" over a house price bubble, as prices and demand are pumped up by government stimulus schemes. It could recommend banks set limits on how much households can borrow, he said.
Under intense questioning by MPs during a two-hour session, the former governor of the Bank of Canada repeatedly stressed that the Bank is firmly tied to its key target of keeping inflation at 2%.
But he said: "I'm not afraid to raise interest rates. I raised interest rates in Canada.
"I have not an issue with doing that if it's appropriate."
Keeping inflation at this figure is priority of Bank of England's governor