Britain tightens monetary policy

This was certainly disappointing:

LONDON (Reuters) – The Bank of England broke with tradition on Wednesday, saying it planned to keep interest rates at a record low until unemployment falls to 7 percent or below, which it views as unlikely for another three years.

But its attempt to steer expectations about future rate moves and bolster a fledgling economic recovery underwhelmed investors who brought forward expectations for when rates would rise from a record low – the opposite of what the central bank was hoping for.

Mark Carney, who took over as governor just over a month ago, said a recovery in Britain’s economy was underway and appeared to be broadening but had a long way to go.

.  .  .

Unemployment is expected to fall only slowly from its current level of 7.8 percent of the workforce, with the central bank expecting it to average 7.1 percent in the third quarter of 2016, the end of its forecast horizon.

This implies that the BoE expects to keep interest rates unchanged until at least that time, unless one of three conditions is breached before then.

But if the recent spurt of strong economic data persists, the jobless rate could fall significantly faster.

“The threshold target for unemployment was higher than the market was expecting and the market’s perception was that if the economy recovers then rates might rise sooner,” said Paul Robson, currency strategist at RBS, after sterling was propelled to a one-and-a-half-month high.

It’s not clear to me whether the BoE got bad advice, or if Carney simply didn’t have the votes.

On the plus side this probably doesn’t fully offset the recent easing at the BoE.



5 Responses to “Britain tightens monetary policy”

  1. Gravatar of Paul Carbone Paul Carbone
    7. August 2013 at 04:46

    I’d lean toward Carney simply not having the votes. Lack of consensus at the BoE seems to be the rule, unfortunately.

  2. Gravatar of Ben Ben
    7. August 2013 at 06:00

    How many times do the BoE have to come out, say one thing and then do another before you start to wonder if they are not “playing cricket”?

    Is employment data simply easier to manipulate than inflation data as inflation starts to pick up, allowing the soft default to continue for longer?

    Or do we have to think only as economists do, in a Panglossian world, where all actors are rational and have the good of the whole of society in their hearts?

    They missed the inflation target since 2009, each month saying that they would hit it soon. Inflation was *way* above the headline rate each time.

  3. Gravatar of James in London James in London
    7. August 2013 at 06:03

    At least they discussed NGDP targeting at the BoE properly for the first time. It won’t be the last.

    See the “Monetary policy trade-offs and forward guidance” document the BoE also produced today:

    It’s wrong, of course, and a rehash of old arguments, but it was the first thing discussed in the list, even if dismissed. It shows that there is more education to do.

    Looking at the make up of the committee there is still a lot of dead wood (both deputy governors are on their way out soon) and dyed in the wool inflation targeters (mixing metaphors). Picking an unemployment target so close to the current level sends an awful message to the market. A real missed opportunity, perhaps, but also a start, maybe?

  4. Gravatar of marcus nunes marcus nunes
    7. August 2013 at 06:36

    Bad advice or lack of votes. No matter, the “Carney bubble” popped!

  5. Gravatar of Bank of England Targeting High Unemployment | uneconomical Bank of England Targeting High Unemployment | uneconomical
    7. August 2013 at 08:07

    […] Scott rightly points out that UK monetary policy is still significantly looser than it was this time last year (market […]

Leave a Reply