A month after taking charge at the Bank of England, Mark Carney has announced a decisive break with the old way of communicating the central bank’s intentions. The new way is “forward guidance,” pioneered by Carney at the Bank of Canada and subsequently adopted, with mixed success, by the Federal Reserve and the European Central Bank.
The idea is fine in principle, but, as the Fed and ECB have lately demonstrated, it’s tricky to apply in practice. The instant reaction to Carney’s announcement suggests as much. He said the central bank’s target interest rate would stay very low at least until the U.K.’s rate of unemployment falls to 7 percent, which he said might be in 2016. At this, the pound strengthened and long-term interest rates briefly went up -- in effect, a slight tightening of policy, one that Carney presumably didn’t intend.