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Inflation reprieve leaves forward guidance battered but intact
by Eleanor Lawrie on Jan 08, 2014 at 07:57
'I think it was a mistake to set the threshold at 7% when there was little analysis to show that this was the point at which unemployment will start to have an effect on wages,' he said, adding that even when joblessness does fall to this level, 'there is very little risk of exploding inflation'.
The economist thinks that while the BoE's credibility 'will take a bit of a hit' if forward guidance is altered, the MPC would prefer that to intense speculation over interest rate rises, with some experts predicting a rise as early as the end of this year.
Neil Williams, chief economist at Hermes, suggests there is scope for the committee to make an announcement on Thursday, but agrees the inflation report might be more a more compelling backdrop, as the bank could justify the change with an upbeat economic forecast.
'The MPC in 2014 may simply push back the staging post, to 6.5%, then 6% before hiking rates, simply because ‘Philips Curves’ (which demonstrate the link between job creation and wage inflation) are so flat,' he says.
'Hypothetically, we may see some adjustment to this guidance as a ‘curtain raiser’ at the year’s first MPC meeting on Thursday, but why rush when it could be justified by a new economic forecast in the Bank’s next Quarterly Inflation Report in February?'
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