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'Tension' surrounding forward guidance is welcome, says Carney
by Sarah Miloudi on Sep 12, 2013 at 10:46
Mark Carney has said he welcomes the 'tension' created by dissenting voices over forward guidance.
During a grilling by MPs, the Bank of England governor was pushed on whether all of the Bank's incoming rate-setters would have to sign up to forward guidance, and asked to reflect on individual views about the three knock-outs set before a rise in interest rates would be considered.
'I think there's value provided by forward guidance and there's value to the tension or creativity that's provided by members forming their own view,' Carney (pictured) said.
He explained that while all existing members of the MPC had signed up to forward guidance, incomers would have to declare whether they were operating under it.
Immediatly after Carney's appointment, which saw him take over as BoE governor from Mervyn King, speculation was rife that he would use forward guidance as a tool for boosting confidence.
He had used a similar strategy during his reign at the Bank of Canada, and in August confirmed he would use the same approach as governor of the Bank of England.
In essance, forward guidance involves the Bank periodically pledging to keep interest rates at a particular level until key conditions, such as the unemployment level falling to 7%, were met.
Supporters of the approach believe that providing clarity surrounding future rises in rates puts markets and savers at ease.
However critics of the strategy include influential figures at the Institute for Economic Affairs, which fears it could boost inflation and create boom and bust cycles.
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