Wealth Manager - the site for professional investment managers

Register to get unlimited access to Citywire’s fund manager database. Registration is free and only takes a minute.

Inflation reprieve leaves forward guidance battered but intact

1 Comment
Inflation reprieve leaves forward guidance battered but intact

Inflation remains benign enough that the Bank of England will not be forced to change forward guidance policy at its policy meeting on Thursday, despite a steady drop in unemployment.

Following the arrival of new governor Mark Carney (pictured) last summer, the BoE announced it was introducing a form of forward guidance, giving businesses and individuals advance warning about when its financial policies will change.

The Bank reassured markets it would not consider raising the bank rate from the historically low level of 0.5% until unemployment falls to 7%, then forecast within the third quarter of 2016.

But since then the UK economy has strenthened considerably, and by the third quarter of 2013 unemployment had fallen to 7.4 per cent, the lowest level since 2009, leading to concerns that interest rates could rise as soon as this year.

In a bid to quell these fears, some argue the MPC should announce a tougher threshold for the interest rate rise, by lowering the required unemployment level. 

But Simon Ward, chief economist at Henderson, told Wealth Manager that any tweaks made to forward guidance at the Monetary Policy Committee on Thursday 'would look a bit reactive,' as the policy is so new.

'I'm a bit sceptical that they will want to move the threshold so soon after introducing it,' he says. 'Carney always saw it as a threshold. They could say that although unemployment has fallen below 7%, there is no sign of wage pressure, so we are happy to keep rates for the forseable future.'

'If I was the MPC, I would try to shift attention to the inflation picture rather than lowering the threshold.'

CPI fell to a four-year low of 2.1% in November, bringing it close to the Bank's 2% target and lessening the need to raise interest rates.

While Azad Zangana, chief European economist at Schroders, is anticipating a change to the policy, he thinks the committee will wait until the inflation report meeting in February.

'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?'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Brewin's Gutteridge: Yuan direction

Brewin's Gutteridge: Yuan direction

This week Brewin Dolphin's research head chats to Fidelity Asian Investment Directors Jenny Lee and Gary Monaghan about the big changes in China.

Play On the Road Challenge: horsing around on the polo pitch

On the Road Challenge: horsing around on the polo pitch

Libby Ashby takes to the polo pitch with Stuart Leigh-Davies from Redmayne-Bentley for an 'On the Road' challenge.

Brewin's Gutteridge: where Miton's Godber sees value

Brewin's Gutteridge: where Miton's Godber sees value

This week Brewin Dolphin's research head talks to George Godber, co-lead fund manager of the Miton UK Value Opportunities fund, about value investing.

Your Business: Cover Star Club

Profile: what tempted Brewin's Glasgow team over to Rathbones?

Profile: what tempted Brewin's Glasgow team over to Rathbones?

Rathbones’ Glasgow office has only been open for three months but the team, led by Angus Kerr, has already attracted new clients

Wealth Manager on Twitter