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12 Sep 2013
BoE: Forward guidance to support economy by reducing uncertainty
FXstreet.com (Barcelona) - Testifying before the UK Treasury Committee on BoE´s latest quarterly inflation report, Governor Mark Carney defended the central bank´s forward guidance on rates by saying that the British households and firms are already feeling its benefits, although the markets remain doubtful.
MPC member David Miles also pointed to the favorable effects forward guidance could have on the UK economy by saying that it would give stimulation without “putting price and financial stability at risk." He added that it would increase the effectiveness of any potential future additional monetary stimulus.
Such stimulus would be needed in case the current recovery falters but for now a pickup in economic activity is evident, Governor Carney said. He also assured that the central bank has not abandoned its 2% inflation target.
The issue of unemployment remains grave, the MPC members agreed, but the jobless rate is expected to fall only gradually towards the 7% threshold, set by the BoE as a reference point allowing for the reassessment of its policy stance. The central bank expects unemployment to reach that level by 2016.
Marcin Budkiewicz, Rates and FX Research Strategist atTD Securities comments: “The talk ended up disproportionately spending time talking about normalizing policy, rates and QE and risks around the knock-out clauses rather than accommodation via forward guidance.”
“This gave the early testimony more of a hawkish flavour than was truly there, and this was helped by Carney’s benign neglect on the long end, as he continues to distance himself from the 'unwarranted' language on rates in July to now say that interest rates are higher on better growth prospects and shows no worries about a steepening curve as long as short term rates and inflation remain anchored.”
MPC member David Miles also pointed to the favorable effects forward guidance could have on the UK economy by saying that it would give stimulation without “putting price and financial stability at risk." He added that it would increase the effectiveness of any potential future additional monetary stimulus.
Such stimulus would be needed in case the current recovery falters but for now a pickup in economic activity is evident, Governor Carney said. He also assured that the central bank has not abandoned its 2% inflation target.
The issue of unemployment remains grave, the MPC members agreed, but the jobless rate is expected to fall only gradually towards the 7% threshold, set by the BoE as a reference point allowing for the reassessment of its policy stance. The central bank expects unemployment to reach that level by 2016.
Marcin Budkiewicz, Rates and FX Research Strategist atTD Securities comments: “The talk ended up disproportionately spending time talking about normalizing policy, rates and QE and risks around the knock-out clauses rather than accommodation via forward guidance.”
“This gave the early testimony more of a hawkish flavour than was truly there, and this was helped by Carney’s benign neglect on the long end, as he continues to distance himself from the 'unwarranted' language on rates in July to now say that interest rates are higher on better growth prospects and shows no worries about a steepening curve as long as short term rates and inflation remain anchored.”