Aug. 8 (Bloomberg) -- The Bank of England will probably need to raise interest rates before the late-2016 horizon currently implied in its new guidance, former U.K. policy maker Charles Goodhart said.
“I think that the strength of the British recovery is probably somewhat underestimated,” Goodhart said in an interview today in London. “The strength of the upwards pressure on the British economy could well cause people to begin to be concerned whether reverting to normality a bit quicker might not be desirable.”
BOE Governor Mark Carney tried yesterday to quell investor expectations on rate increases by saying officials won’t raise the benchmark from a record low 0.5 percent until unemployment falls to 7 percent, which they don’t expect until the second half of 2016. Investors bet that the central bank will act before then to tackle faster inflation as part of a caveat enshrined in the new policy.
“I don’t think forward guidance is ever very effective -- it’s cheap talk,” said Goodhart, who was a founding member of the BOE’s Monetary Policy Committee. “I think, when it comes to the crunch, that the committee will always do what it thinks best on the day.”
The so-called forward guidance presented by Carney has three “knockout” clauses that allow officials to override their rate outlook if inflation or financial stability conditions require it. Goodhart said that such a policy means the BOE doesn’t need to change the policy because it hasn’t constrained its room for maneuver.
“I think there are so many conditions that are sufficiently flexible that the MPC can almost do what it wants whenever it wants to,” he said.
Goodhart said the MPC may have had no choice but to introduce the policy because Chancellor of the Exchequer George Osborne signaled his desire for guidance on interest rates earlier this year.
“Given the context, given the expectations, given that it had been raised, given the mandate that they had to follow, I think they did as well as they could,” he said.
Goodhart, 76, was on the MPC from 1997 to 2000. He devised “Goodhart’s Law,” which holds that targeting monetary aggregates as a surrogate for inflation is futile.
He spoke on the sidelines of an event organized by the Social Market Foundation in London.
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