Weale Says BOE Guidance May Only Have Limited Impact on EconomyScott Hamilton and Emma Charlton
Bank of England official Martin Weale, who objected to forward guidance because it might threaten inflation credibility, said the policy may only have a modest impact on the recovery.
Weale said today that while guidance reduced uncertainty about the outlook for near-term interest rates and that this probably added some stimulus, “the effect is almost certainly very small.” He said the full impact over time will depend on how well it is understood by businesses and households.
Governor Mark Carney introduced guidance in August, revamping the central bank’s policy framework. Weale was the only one of the nine-member Monetary Policy Committee to dissent, favoring a tougher clause on inflation. Under the plan, the BOE has said it won’t raise its key interest rate at least until unemployment, now at 7.6 percent, drops to 7 percent.
“I am comfortable that the policy has had a modest effect in supporting output, and, at least as far as we can see from the data, it has achieved one of the aims we set out of reducing uncertainty,” Weale said in a speech in London.
Guidance is subject to knockouts linked to the inflation outlook, expectations for price growth and financial stability. Weale said today he was unhappy with one of the conditions because it “implied a greater tolerance of inflation 18 to 24 months ahead than I felt was consistent with our remit.”
He added that a recent “sharp and unexpected fall” in the inflation rate makes it “considerably less likely” that the inflation knockout will be tested.’’
U.K. inflation slowed to 2.2 percent in October, just above the BOE’s target of 2 percent. The central bank’s benchmark rate is at 0.5 percent, a record low.
“There has probably been a modest stimulus” from guidance, “but not one so large as to lead to a perceptible impact on short-term inflation expectations,” Weale said.
Weale said that guidance was introduced at a time the economy didn’t need further support. U.K. growth accelerated to 0.8 percent in the third quarter, the fastest in three years.
On the impact of the plan on the recovery and inflation, Weale said it’s likely to be smaller than models suggest.
While fully effective guidance that delays expectations for a rate increase by 12 months may raise output by as much as 0.75 percentage point, “it seems to me likely that the initial effects will be appreciably smaller,” he said. “To the extent to which understanding of the policy does build up, its impact may well rise over time.”
“We do not, as yet, have any firm information on how well the policy has been understood,” he said.
Weale said that while medium-term inflation expectations have risen, the move wasn’t significant. “The position nevertheless needs to be monitored carefully,” he said.
The policy maker noted the impact of the recent strengthening of the U.K. economy on expectations for future borrowing costs. He reiterated the MPC’s view that the 7 percent threshold isn’t a trigger to tighten policy.
“Other things being equal, good news on underlying inflation reduces the case for tightening while rapid economic growth and, more especially, rapidly falling unemployment strengthens it,” he said.