Policymaker queries rates strategy

Banbury Cake: The Bank of England, as a Monetary Policy Committee member said the stimulus was "almost certainly very small"
The Bank of England, as a Monetary Policy Committee member said the stimulus was "almost certainly very small"

A key Bank of England policymaker has broken ranks with governor Mark Carney by expressing doubts about the effectiveness of its flagship low-interest rate policy on encouraging growth.

Martin Weale, a member of the Bank's Monetary Policy Committee (MPC), said the stimulus provided to the economy by forward guidance was "almost certainly very small".

His remarks appear at odds with those of Mr Carney, who has said the policy "reinforced the recovery".

Forward guidance, introduced in the summer, is a pledge by the MPC not to raise interest rates above their current historic low of 0.5% before unemployment falls to a threshold of 7% - subject to inflation remaining under control.

It is designed to give households and businesses the confidence to borrow.

But critics say it has backfired because signs that the jobless rate is falling more quickly than expected has fed through to a higher cost of borrowing on money markets, increasing the cost of some lending in the real economy.

Mr Weale was the only one of the nine-member MPC to vote against the policy announced in August - with minutes of the meeting revealing that while he backed the idea, he wanted to see a tighter safeguard against inflation built into it.

In a speech in London today, he said his own assessment showed the policy had eased uncertainty about the path of near-term interest rates.

"This decline in uncertainty probably provides some stimulus to the economy but the effect is almost certainly very small," he added.

Mr Weale said that in theory, the effect of forward guidance should be "powerful" provided it leads to a marked change on the view of future interest rates.

But he added that it was "inconceivable" that without forward guidance, the MPC would already have voted to lift interest rates and that the only thing that had stopped them was forward guidance.

"If forward guidance has done no more than to codify what people had expected the Monetary Policy Committee to do anyway, then its effects on the profile of expected future rates, and thus on output and inflation, should be expected to be small."

Mr Weale said forward guidance appeared to have led to market expectations of interest rates being about 0.25% lower, up to two years into the future, than they would otherwise have been.

If such views were held throughout the economy, it could lead to output growth of 0.5% to 0.75%, he said, but expressed scepticism that such details would be widely appreciated by households.

"Unless people have taken an unusual interest in what my colleagues and I have said about policy, it seems to me likely that the initial effects will be appreciably smaller."

He also said that his view on the framework when the committee voted on forward guidance in the summer was that it was too tolerant of inflation than was consistent with the Bank's remit to achieve a 2% target.

A "knock out" to the policy announced by the MPC means that, if inflation is expected to be 2.5% or higher in 18 to 24 months, the guidance can be set aside.

Mr Carney has stressed that the guidance is a threshold for considering a rate rise, not a trigger to enact one, adding that the beneficial effects of keeping it low for longer will also be weighed.

But Mr Weale said in his speech that should unemployment be falling rapidly to reach 7%, it would strengthen the case for an early rate rise.

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