The Bank of England’s ‘forward guidance’ has encouraged households and businesses to spend and invest as it has given them certainty about interest rates, the deputy governor for monetary policy has said.
In remarks delivered at the Jackson Hole Economic Policy Symposium, Charlie Bean, deputy governor for monetary policy, said the bank’s announcement that it will not push up interest rates until employment has fallen to at least 7 per cent “should boost confidence”.
He said: “Moreover, it should reduce the likelihood that the present expansionary monetary stance is withdrawn prematurely through an upward movement in market interest rates.
“Short-term yields have moved up since our announcement on a string of good news about the economy, but the unemployment threshold, by serving as a reminder of just how much growth is needed to regain lost ground, should temper the extent of any tightening.
“Indeed, for that reason, guidance is potentially more valuable during exit than during entry. Finally, given the uncertainty about the causes and durability of the recent exceptional weakness in UK productivity growth, it also provides a robust framework within which to test the scope for economic expansion without jeopardising price or financial stability.”
Mr Bean added the forward guidance gives reassurance as when a central bank’s reaction function is “not well understood”, market interest rates tend to respond to policymakers’ actions in response to economic data whereas when the reaction function is well understood, market interest rates will instead respond earlier as the economic data unfolds.
He said: “Although there are benefits to the market more accurately anticipating a given policy decision, because the data are likely to evolve in an imperfectly predictable fashion, so will market interest rates and asset prices.
“In sum, then, exit will be challenging, both for the central banks in the countries withdrawing stimulus and those in other countries that will be affected by the international spillovers. But we do have the luxury of knowing that it will come eventually and can plan for it appropriately.
“And when it does come, it should be against the background of a markedly better economic outlook in the advanced economies. That itself would be a most welcome change.”