Like the Fed, Bank of England could go 'dotty' with forward guidance

Mon Feb 3, 2014 11:00am EST
 
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By Andy Bruce

LONDON (Reuters) - When it begins overhauling its "forward guidance" policy this month, the Bank of England may be tempted to look across the Atlantic for inspiration, perhaps even cloning one of the tools that has served the U.S. Federal Reserve well.

It could all be in the "dots" - a published matrix of where rate-setters think interest rates are heading. That, at least, is one of the things the Bank is expected to ponder.

Central banks, unable to cut rates much below their record low levels, have resorted to forward guidance, or statements of intent, to persuade markets and the public they will not raise rates for a long time as economies struggle back to growth.

The BoE introduced its guidance only six months ago, but it hasn't worked out as planned.

Britain's unemployment rate has fallen within a whisker of the 7.0 percent level at which the Bank had said it will review interest rates. That is far sooner than expected, forcing policymakers to stress they have no plans to hike rates soon.

So Governor Mark Carney has said the Bank will start looking at how to "evolve" - or in other words, overhaul - guidance this month, generally taken to mean when it unveils the quarterly Inflation Report a week on Wednesday.

Although the BoE might not set out in detail how it will expand forward guidance, the report might at the least offer insight to its thinking.

While many economists expect it will eventually broaden guidance to include more economic indicators such as wage growth, it could make a bigger impact with evolving Fed-style "dot" charts.   Continued...

 
The logo is seen at the Bank of England in the City of London January 16, 2014. REUTERS/Luke MacGregor