Bank Of England Folds On “Forward Guidance”

Just a week ago, Ben Bernanke stumbled when he almost admitted that "forward guidance worked in theory, but not in practice," and while the Fed is sticking to its guns with lower for longer "forward guidance" to replace "as much money as you can eat" quantitative easing; and the ECB promising moar for longer; the Bank of England's Mark Carney just threw them all under the bus by u-turning on his employment-based forward guidance strategy. Having previously established thresholds for his monetray policy guidance, as the FT reports, he has now ditched those plans (as we warned he might "lose his credibility" here) as the British economy is "in a different place" now. And still, we are supposed to trust these bankers to run the world? Perhaps most interesting is the FT changed its title on the story very quickly!

Via The FT,

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Mr Carney signalled the policy U-turn in a series of TV interviews while attending the World Economic Forum in Davos. However, he added that he had no plans to raise interest rates “immediately”.

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Speaking to the BBC’s Newsnight in response to the news this week that UK unemployment had fallen to 7.1 per cent, almost to the point the BoE said it would consider a rate rise, the bank has decided not to revise its 7 per cent unemployment threshold but drop the idea completely.

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The BoE followed the Federal Reserve in announcing forward guidance last August in a bid to make monetary policy “more effective”. It said it would not consider a rate rise in the UK at least until unemployment fell to 7 per cent from the rate last summer of 7.9 per cent.

The BoE forecast that it was most likely that unemployment would fall to the 7 per cent threshold only in 2016. Recognising a serious forecasting error has caused red faces at the BoE and created confusion over the policy, Mr Carney will address the subject again on Friday and Saturday.

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Commenting on the huge errors in the bank’s forecasts, Mr Carney said: “If our forecast is going to be wrong, it’s better to be wrong in that direction”.