Markets are gearing up for Wenesday’s inflation report from the Bank of England.
Mark Carney, BoE governor, 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.
“The unemployment rate forecast in conjunction with the threshold is simply a signaling device to tell the markets, and at least as important the public, that it has no intention of raising rates until it is sure the state of the economy warrants it, i.e. not yet,” writes Societe Generale’s Brian Hilliard.
“That intention has not changed so the MPC has to make that very clear by modifying the forward guidance to reassert the message that policy will not yet be tightened.”
Hilliard thinks it is unlikely that the MPC will lower the threshold. It’s also unlikely that we’ll see individual forecasts of the date of the first rate increase, similar to the Fed, but the Court of Directors of the BoE will likely reject this.
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),” writes Hilliard.
Jessica Hinds at Capital Economics doesn’t think the MPC will raise key rates until Q4 2015.
“We suspect that revamped forward guidance will end up being more effective than its predecessor,” writes Hinds. “This is due to the fact that it is likely to focus on a wider range of indicators, which will not allow markets to take issue with a specific forecast.”
Of course the inflation report usually brings updates on GDP and inflation forecasts, but the focus this time around will be on forward guidance.
The Bank of England MPC inflation report is out 5:30 a.m. ET on Wednesday. Carney will also be speaking then.
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