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The Bank of England in the city of London. (OLIVIA HARRIS/REUTERS)
The Bank of England in the city of London. (OLIVIA HARRIS/REUTERS)

Bank of England to change forward guidance on economy Add to ...

The Bank of England has forecasters in suspense about how it will restore its “forward guidance” policy, according to a Reuters poll ahead of an expected revamp of the central bank’s monetary policy centrepiece this week.

A plunge in Britain’s unemployment rate has forced the Bank to work on a revised plan. The poll showed little common ground among economists on its most likely approach.

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Bank Governor Mark Carney has conceded the bank was wrong with its forecasts on unemployment and said it would begin the process of “evolving” its guidance in February to make sure Britain’s recovery is given help to become more sustainable.

Bank watchers expect the central bank will use the publication on Wednesday of new quarterly economic forecasts to make a verbal commitment to keeping interest rates at their all-time low of 0.5 per cent.

“The key message will be that rates will remain unchanged for some considerable time,” said Brian Hilliard, chief U.K. economist at Société Générale.

Central banks in many advanced economies are unable to cut rates much below their current record low levels.

Instead, they have resorted to making statements of their intent not to raise rates to give their economies more time to recover from the damage wrought by the financial crisis – so-called forward guidance.

The bank introduced its guidance in August, barely a month after the arrival of Carney. It hasn’t gone to plan.

Unemployment has plunged to within a whisker of the 7 per cent level at which the bank said it would review interest rates. The fall has been much quicker than expected, forcing policy makers to stress in speeches and interviews that they have no plans to raise rates soon.

Helping them has been a fall in British consumer prices to 2 per cent for the first time in more than four years and that trend could give the bank another way to underscore its low-for-long message on interest rates.

The Reuters poll showed 24 out of 30 analysts in the poll, conducted late last week, expect the bank’s new forecasts to show inflation will be weaker in the next two years than it previously projected.

“Coming out with a really low medium-term inflation projection would be a great excuse [and implicit forward guidance] for leaving the bank rate on hold for some time to come – which is what recent speeches have suggested the Monetary Policy Committee wants,” said Alan Clarke at Bank of Nova Scotia.

Howard Archer, chief U.K. and European economist at IHS Global Insight, agreed.

“If the BoE’s forecasts show inflation at 2.0 per cent – or lower – on a two-year horizon on the assumption of unchanged interest rates, that would be a strong indication that it currently does not expect to be raising interest rates before late 2015 or even 2016,” he said.

While 16 economists thought the bank would make a strong verbal statement on keeping rates low, there was a range of views on what else it would announce.

Five said it will lower its unemployment rate threshold to 6.5 per cent – something one MPC member has said he did not support – while four said it would abandon forward guidance altogether.

Others said it might broaden out the range of indicators it explicitly links to its interest rate deliberations to include wage growth, a key gauge of the economy returning to health.

Some participants in the poll said the bank might start to publish the range of views among policy makers on where interest rates will be in the future.

This could be either on an individual basis such as the “dot” charts used by the U.S. Federal Reserve, or a collective forecast, as done by Sweden’s Riksbank.

Most respondents said the bank would keep its projections for economic growth roughly unchanged from November’s forecasts.

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