Carney overhauls forward guidance to cool rate rise fears
Bank of England Governor Mark Carney has been forced to overhaul his six-month-old forward guidance policy as Threadneedle Street switched aim to take up more slack in the economy before raising interest rates.
The Bank has been surprised by how rapidly unemployment has fallen.
Carney – who insisted forward guidance "is working" – published the Bank's estimate of the so-called "output gap" of slack in the economy for the first time, putting it at between 1% and 1.5% of GDP. The shift in policy, however, reveals a more optimistic outlook by the central bank.
"What matters is not that Mr Carney has ditched forward guidance, but that the reason he has dropped it is the UK economy is recovering far faster than anyone expected," Glenn Roberts, Senior Partner at Deloitte in Belfast, said. "The economy is delivering positive surprises. Here in Northern Ireland we are reflecting that though not at the same pace."
The Bank's new "evolved" guidance insists that it will target soaking up the spare capacity in the economy over the next three years. There is scope for more slack to be taken in before interest rates are raised, the Bank said.
Interest rates will only rise "gradually" and the Bank will monitor a range of indicators such as labour force and surveys of spare capacity. Rate rises will also be limited – potentially standing at 2% only three years from now, Carney added.