Financial Reporter: BoE follows in the Fed's footsteps with forward guidance strategy
Fri 09 Aug 2013
The Monentary Policy Committee's Inflation Report today has confirmed that, as expected, the committee intends to utilise a strategy of 'forward guidance'.Under this strategy, the Bank of England will periodically promise to keep interest rates at a particular level, until certain economic conditions are met. The Committee has emphasised that it intends to maintain the current 'highly stimulative' stance of monetary policy until economic slack has been substantially reduced, provided this does not create risks to either price stability or to financial stability. In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the unemployment rate has fallen to a threshold of 7%, although Governor of the Bank, Mark Carney, noted that this was not a 'target' but a reflection on the state of the economy.
The MPC said it would consider further asset purchases while the unemployment rate remains above 7% if it judges that additional monetary stimulus is warranted. But until the unemployment threshold is reached, and subject to the conditions below, the MPC intends not to reduce the stock of asset purchases financed by the issuance of central bank reserves and, consistent with that, intends to reinvest the cash flows associated with all maturing gilts held in the Asset Purchase Facility. The Committee will continue to set the level of Bank Rate and the size of the asset purchase programme each month, taking these criteria into account. The action taken by the MPC if any of these knockouts were breached would depend upon its assessment at the time as to the appropriate setting of monetary policy in order to fulfil its remit to deliver price stability.
There is therefore no presumption that breaching any of these knockouts would lead to an immediate increase in Bank Rate or sale of assets.Governor Mark Carney said:"A renewed recovery is now underway and it appears to be broadening, but the recovery remains weak by historical standards. It's more improtant than ever for the MPC to be clear and transparent in order to avoid tightening Even under the assumption that the current exceptionally stimulative stance is maintained, the MPC expects GDP growth of 2.4pc in 2 years time, a rate little below historical average."This is the slowest recovery output on record. Unemployment still high, 1m more are unemployed than in the financial crisis. We have exceptionally weak productivity, a significant margin of slack in economy, scope for rebound very uncertain.
Inflation is at 2.9pc and is likely to remain about that level in the near term. Underlying domestic inflationary pressures remain subdued. Even on the assumption that rate remains at current level, inflation will fall back to 2pc a little after the two year horizon.This is an exceptionally challenging environment in which to set monetary policy."Jonathan Harris, director of mortgage broker Anderson Harris, says:"While the Bank is not promising to keep interest rates low for a particular period of time, it expects that rates will not rise above their current level of 0.5 per cent before the third quarter of 2016. This is far more certainty than we have ever had and while it brings no comfort to savers, it will reassure overstretched borrowers who are worried about potential rate rises."We expect fixed-rate mortgages to fall even further on the back of this announcement. They may already be at historic lows but if lenders are to convince borrowers to opt for a fix when interest rates are highly unlikely to rise, then pricing needs to be attractive.
Borrowers who prefer the certainty of a fixed rate and particularly those looking for something beyond the next three years when it is less certain what will happen with interest rates, should consider a five-year fixed-rate deal."Peter Rollings, CEO of estate agent Marsh & Parsons:With his statement today Mark Carney has given the UKs housing market a significant boost. The London market, in particular, is presently underpinned by rising positive sentiment due in part to the Governments Funding for Lending Scheme and the Help to Buy initiatives as well as strong demand from home and abroad.
Growth in the countrys GDP, reduction in unemployment and a feeling that we are finally out of the economic badlands means that the market can now be assured of certainty as far as interest rates are concerned.This is a highly important statement which will allow lenders to offer attractive fixed rate deals to potential buyers and will surely lead to greater demand and activity in both the resale market and provide a fillip for first time buyers. The Governor is implicitly saying interest rates will not rise until million more people are in work.
This will give the market across the UK much welcome stability.John Fox, managing director of the pension provider Liberty SIPP, comments:"As Mark Carney basks in the plaudits, many pensioners will be wringing rather than clapping their hands. The Governor's commitment to what's likely to be an extended period of low interest rates is disastrous news for pensioners who rely on savings for their retirement income."Such loose monetary policy may stimulate the wider economy, but the inflation side-effect it is likely to trigger will erode the spending power of anyone struggling to live on an annuity. Much of the blame for tumbling annuity rates can be laid at the Bank's door too.
By depressing gilt yields, its QE programme has sliced chunks off the retirement income of anyone who has bought an annuity in the past three years."There is one ray of light, in that the steady growth of UK equity markets since the recovery took root is driving up the value of people's pension pots - and is making drawdown a more appealing option for those who are approaching retirement and looking for a better deal than an annuity."Managing partner of financial services firm True Potential, David Harrison, said:What Mark Carney has already achieved has been great and he appears to have had an immediate impact on optimism he has provided a real shot in the arm for business.Any help the BoE gives in an uncertain world even a slight increase in certainty is a benefit to businesses and savers and the banks new powers are a marked change to previous regimes which didnt provide any real leadership.
Of course the low interest rate means that savers will still struggle to get any value at out of cash products, and will continue to struggle for some time, but the boost it delivers to the economy ought to be worthwhile. We firmly believe that investment in stocks and shares funds represent the best way to get value and returns from savings, while helping the economy at the same time.