Carney’s compromise

The past week has seen a lot of excitement in the UK with the announcement of forward guidance by the Bank of England. In my day job I’ve been writing and talking (at 1:22) about it a lot lately, although I tend to leave the macro blogging to Matt. However, I’m going to make an exception for this announcement because there was just so much hype surrounding it.

If you want to know what others are thinking, Britmouse has a great round-up of the reaction so far and it is overwhelmingly negative. Views are split into two distinct camps: there are the people who think there is no output gap and rates should rise sooner, and there are the people who think it didn’t go nearly far enough.

The negative reaction to the announcement probably reflects the split in the Bank’s Monetary Policy Committee. For months they’ve been divided on the need for further easing, with a third of them voting for more QE and the remainder opposed. The new Governor, Mark Carney, has managed to unite them around forward guidance but the deal he made smacks of compromise. On the one hand he placates the doves by promising not to lift rates or reduce QE until a mild recovery eventuates. On the other hand, he has avoided easing policy at all and the forecast path of inflation has actually fallen since the previous round of forecasts.

By avoiding a commitment to ease policy he has ensured that the guidance threshold will be a feature of monetary policy in the UK for years to come. Indeed, the Bank is forecasting unemployment to remain above its 7% intermediate threshold for another 3 years. When you consider unemployment has already been pinned at 8% since 2009 it’s possible that the NAIRU, which was previously around 5-5.5%, will have risen. That highlights one of the risks of tying the threshold to a real variable that the Bank cannot alter in the long run. They’ve tried to avoid the problem by picking a very high threshold but that merely weakens their commitment to supporting the recovery. Nevertheless, Carney’s compromise is a small step in the right direction and for that he should be applauded.

  • Useful stuff man!

    Did they give any hints about what they mean about the quote noted here (

    “Carney said the unemployment target could be abandoned should the bank’s
    internal analysis show GDP growth was the cause of a rise in prices of
    more than 2.5% in two years’ time.”

    You’ll notice in the post I hazarded a guess, but was really just shut down 🙂

    • I think you’re exactly right, it’s about keeping the Bank’s forecast below 2.5%. It doesn’t matter that it isn’t clear because it’s not meant to be part of the main message to the public: it’s there to placate the inflation hawks who are worried that the Bank is trying to squirm out of the inflation target. The whole ‘GDP growth’ thing is probably just to give the Bank wiggle room if there are external price shocks so I don’t think the meaning in terms of an economic model is of huge importance. Let’s also bear in mind that this is a speech to the press, not a lecture to an academic audience!

      • Tis true – have they been clear that they “will look through external shocks to prices”. The RBNZ over here states that, and then tries to show core and sectoral factor models that help to account for such things.

        Or do they view such things as missing the point, or do they put more value again on discretion?

        • BoE under King was very keen on discretion and isn’t nearly as transparent as the RBNZ. For example, they’ve talked a lot about ‘slack’ but refuse to publish their estimates of the output gap. We’ll see if things change under Carney…

          • So the RBNZ and RBA are just straight up better 🙂

            • Well, the BoE did pioneer the Rivers of Blood, and that must count for something!

              • I don’t understand? I like any knowledge of references to the Motherland.

                • Ha, it’s not that bad! Check out the inflation projections in back of the BoE’s Inflation Report. The red fan chart looks like a river of blood.

                • Owww, I get it. Thank goodness!

  • Teknoloji Haberleri

    Thank You Post

  • “The Bank should have chosen a nominal GDP target to guide its decisions, rather than establishing the unemployment link. This would ensure strong, immediate support for growth while remaining consistent with the inflation target. – See more at:

    Goodness me! You have more confidence in this than I do 😀

    Perhaps a series of posts discussing it would be fun?