Mark Carney has begun the inflation report. “The recovery has gained momentum,” Carney says.
“Forward guidance is working… uncertainty about interest rates has fallen,” Carney said. The framework has highlighted difference between monetary and macroprudential policy.
But Carney points out that the unemployment rate fell much faster than expected and is likely to reach the threshold by Spring. Productivity growth has been disappointing. expect to return to pre-crisis rate at the end of three year forecast. Greater slack in job market than expected.
Bank of England raised UK economic growth forecast to 3.4%, from previous forecasts for 2.8% growth.
Carney says there will be five elements to new guidance. 1. Guidance to absorb all the spare capacity. 2. There remains more room to absorb before raising rate. 3. If and when the time comes that the economy recovers, the bank rate is expected to rise gradually. The timing and pace will reflect degree of spare capacity in the economy. Will consider a range of indicators. 4. Any rise in bank rate will be limited. Level of interest rates will need to be materially lower than before the crisis. 5. MPC will maintain stock of purchases until after a rise in rates.
Carney says they won’t take risks with the economic recovery.
The press conference has begun. Here are some of the highlights:
Carney emphasises he isn’t giving time-contingent guidance, he’s giving stage-contingent guidance.
Unemployment was the right metric, Carney says.
Carney says the MPC will not publish a path for expected rise in interest rates.
In terms of increased communication, Carney says the MPC has tried to consistently increase amount of information and context. This is a pretty open institution.
“We’re not complacent about this recovery at all. We’re serene not complacent. …It’s very important that there’s a hand off to business confidence.”
“The objective is not to have forward guidance forever. …Was first about securing nascent recovery.”
Markets expect rates to rise in 2015.
Here’s a look at the indicators of labour market slack that the MPC considers:
In a few minutes Bank of England’s Mark Carney will present the inflation report.
Carney is expected to present modifications to the forward guidance framework used to guide monetary policy. The current language was first introduced in August 2013.
The unemployment rate has ticked down to 7.1%, and is already close to the 7% threshold for raising interest rates.
Of course, the Monetary Policy Committee (MPC) did emphasise that reaching threshold wouldn’t automatically trigger higher rates, but that it would a time to reassess the state of the economy.
It’s most likely that the MPC will specify a broad range of labour market indicators to keep an eye on.
“For now, we just focus on the unemployment gap which is defined as the difference between the unemployment rate and Bank staff’s estimate of the medium-term equilibrium unemployment rate (MEUR),” Societe Generale’s Brian Hilliard said in a note ahead of the report.
Of course the inflation report usually brings updates on GDP and inflation forecasts, but the focus this time around will be on forward guidance.
At its latest meeting the BoE kept its interest rate at 0.5% and its asset purchase program at £375 billion.