Boundaries are hard to define ...
Andrew Bailey, Governor of the Bank of England explained this week "Forward Guidance is a Murky Job". Obscure or dark and gloomy, we cannot he absolutely sure about the Governor's meaning or intent.
"The boundary between commentary on the state of the economy and what the central bank is likely to do with interest rates is hard to define." he said, especially when you consider "the words we use" he added.
The system put in place by my predecessor, Mark Carney, is pretty hazardous and "more hazardous in an uncertain world". Gosh who knew it was a system. Carney announced in 2013, the Bank would consider raising rates when unemployment fell to 7%. Unemployment hit 4.3% in the latest data, inflation RPI surged to 6%.
Former Governor Mervyn King berated the current crop of central bankers. Central banks have been caught unawares by rising prices. This has exposed the "King Canute" theory of inflation. In a lecture to the Institute of International Monetary Research, he explained, "A thousand years ago, King Canute (of England) set his throne by the seashore and commanded the incoming tide to halt. The tide continued to rise and dashed over his feet and legs." [But at least the number of illegal immigrants hitting the beach that day fell.]
"Canute was defied by the laws of nature" and the lack of an adequate flood defense system. The moral of the story, central bankers cannot expect inflation to fall, just because the models say it will. A satisfactory theory of inflation cannot take the form of "inflation will return to target because they say it will", [just because it always worked for me.]
"A central bank should not be ashamed to acknowledge that it does not know where interest rates will be in the future, because it cannot know where the economy will go in the months and years ahead." Many may prefer the murky obscurity of the current regime to the Mervyn King reality check.
No such problem for Huw Pill, Chief Economist at the Bank ..."Given where we are in terms of data and analysis, I view the likely direction of travel for monetary policy from here as pretty clear". He signaled he was ready to press ahead with the first rate rise, now "the ground has been prepared for policy action". It was the clearest hint, it was said, that borrowing costs will rise, as early as next month.
Students of history will recall there has been no increase in base rates in December for the last fifty years. The Chief Economist sweetened the pill with a note of caution. The economic outlook remained uncertain and there was no guarantee that rates would rise. Excellent ... The Chief Economist was speaking at the CBI conference this week, so too was the Prime Minister ...
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