Posen Predicts BOE Will Do Fed-Style Forward Guidance by August
The Bank of England will soon start providing forward guidance on monetary policy in a manner similar to the U.S. Federal Reserve, former U.K. policy maker Adam Posen said.
“What I’m pretty sure Carney and the Monetary Policy Committee will do by August is some form of forward guidance,” Posen told Francine Lacqua in an interview on “The Pulse” on Bloomberg Television today in London. “It will be along the Fed lines, what Charlie Evans led at the Fed.”
Mark Carney will replace Mervyn King as governor at the BOE on July 1, having expressed his support for giving investors an outlook on the future path of policy. The measure is one that the central bank may adopt after the government boosted the flexibility it has to meet its inflation goals and spark an economic recovery.
Fed Chairman Ben S. Bernanke and colleagues have said they will continue their $85 billion-a-month pace of asset purchases until the labor outlook improves “substantially.” Evans, the president of the Chicago Federal Reserve, has said along with Boston Fed President Eric Rosengren that they want to see the U.S. economy add 200,000 jobs a month before scaling back stimulus.
Posen said that the MPC will introduce an intermediate target or threshold, as the U.K. Treasury has “clearly” said that’s what it wants.
“I’m not sure how much difference that will make unless people have been pricing in a premature rate rise,” said Posen, who served on the panel for three years until Aug. 31. “I view in general that this is cheap talk.”
The Bank of England’s Funding for Lending Scheme to boost credit “has been disappointing,” because it was trying to use the current banking system, “which is totally damaged,” Posen said. He said the other option for officials is to do credit easing by buying securities other than gilts.
The bank has held its bond-purchase program at 375 billion pounds ($587 billion) since July. With six of the nine-member panel having resisted King’s push to expand quantitative easing, a revival of that stimulus tool isn’t probable, Posen said.
“The very likely outcome is that they don’t do much,” he said. “They’re not going to reverse just because the new governor has come in. QE as we know it in standard form by buying gilts is on hold.”
Posen also said the pound isn’t seen by members of the MPC as an instrument of policy. Sterling has risen 4.5 percent on a trade-weighted basis since March 12.
“The pound really is not a major factor in MPC decisions,” he said. “Broadly speaking the pound’s been very stable.”
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