eagerly anticipated move, Carney said during his inaugural
inflation report press conference that the BoE would
raising interest rates until the unemployment rate has fallen
to 7% or below.
said he expected this would require the creation of about
750,000 jobs and could take three years. The UK unemployment
rate stands at 7.8%.
It is now more
important than ever for the
Monetary Policy Committee (MPC) to be clear and transparent
about how it will set monetary policy in order to avoid an
unwarranted tightening in interest rate expectations as the
recovery gathers strength, said Carney.
is why the MPC is today announcing explicit state-contingent
Few issues have been more topical in the world of central
forward guidance in recent months, with the
European Central Bank and the BoE seeing it as a powerful new
weapon in their arsenal.
ECB president Mario Draghi said in July: The governing
council has taken the unprecedented step of giving forward
guidance in a rather more specific way than it ever has done in
pledging to keep interest rates low, central banks are
supposedly able to kill two birds with one stone: monetary
policy can be loosened further and the longer end of the curve
remains well anchored.
factors, it is hoped, will then help to stimulate the
official policy statements, forward guidance comes in various
forms. The most interesting way of classifying it was given
last year in the paper Macroeconomic Effects of FOMC Forward
authors Jeffrey Campbell, Charles
Evans, Jonas Fisher and Alejandro Justiniano
between Odyssean and Delphic forward
Odyssean a reference to Odysseus, Greek king of Ithaca
central banks signal their strong commitment towards a
different behaviour, in effect tying themselves to the mast as
Odysseus did when he was passed the land of the sirens by
banks therefore promise to keep the policy rate at the zero
lower bound for a longer period than signalled by traditional
Delphic derived from the oracle of Delphi is a
softer and less-binding version of forward guidance. Central
banks try to guide expectations of market participants about
the future policy path.
main central banks, Delphic forward guidance dominates,
although there are a couple of exceptions such as the US
Federal Reserve, which makes quite specific but still
conditional statements, and the
Bank of Japan.
and the BoE, it appears they
are taking the softer Delphic approach too.