Bank of England reputation has been damaged by Forward Guidance policy, says survey

The manner in which the Bank of England have managed their forward guidance policy has damaged its reputation, according to a multitude of economist polled in a recent survey to gauge attitudes towards the policy.
This is despite the fact that 2013 saw the unemployment rate in Britain fall sharply to just 7.1%, and growth improvements meaning that Britain now has one of the fastest growing economies in the western world.
 
Numerous states resorted to utilising the ìforward guidanceî policy in their economic policy, which entails keeping interest rates low until that time that the economy and living standards had recovered.
However, despite its apparent success, half of economists polled in a study by Reuters argued that the Bank of England had actually damaged its reputation over they it has implemented it and continues to manage it. 
“Nobody would deny the BoE the need to change its assessment when the future pans out differently to expectations,” said Peter Dixon, an economist at Commerzbank.
“But the forward guidance policy looks set to join the long list of quantitative targets which have been junked when they fail the a priori justification for policy settings – after just six months.”
The success of the policy has been of much debate in recent times, with different groups offering different arguments to account for its performance.
Some economists have said that despite its shortcomings, it was still a needed measure in order to move away from the supremely lose rate policy that marred the recession era into one of normality as the recovery takes grip.
However, others have said that it has inhibited interest rate rises happening now, when they should really be considered, and have criticised the Bank of England from reneging on their promise to consider hikes when unemployment reached 7%, which currently stands at 7.1%.
The issue most critics have taken is the Bankís forecasting performance, where they have failed to act when initial thresholds have been breached and have constantly re-aimed the policy. 
When the 7% threshold for unemplyoemnt was initially given in August for when interest rate rises would be considered, it had been thought that this would take 3 years to achieve. However, the staggering progression in the economyís growth during the latter stages of 2013 mean that this will likely occur sometime in Spring this year. 
However, Bank governor Mark Carney has said that they would now wait until wages and labour productivity had picked up before raising rates, which has led many economists to dub the forward guidance policy backwards and lacking progression. 
“The BoE’s forecasting model has lost credibility,” said David Kern, chief economist at the British Chambers of Commerce. 
“But forward guidance is still very valuable, because it reassures businesses that the MPC will not rush to raise rates until this is absolutely necessary.”
With wages currently far below their pre-recession levels, and the cost of living constantly on the rise in the UK, many commentators have dubbed Britain to be in a ëcost of living crisisí at the moment. 
The reality is that despite economists criticisms of the Bankís forward guidance policy, that their commitment to retaining low interest rates for the time being is the right thing to do, because it is protecting those who have acquired loan rate loans at the moment.
If rates were to rise soon, then those who had acquired mortgages or even low rate loans would be faced with higher monthly payments, which could further worsen their finances which are already overstretched. 
Furthermore, low labour productivity has meant that wages have remained low, and until this is addressed sufficiently, it would be unwise to raise rates.
So for the time being, the verdict is still out with the Forward Guidance policy, as the Bankís conservatism and pragmatism may well be the thing that saves working class families a severe level of financial difficulties a few years down the line. 

 

Leave a Reply

Your email address will not be published. Required fields are marked *