The Bank of England’s decision to provide explicit guidance on the path of interest rates was motivated by the desire to give consumers and firms more confidence to spend, the central bank’s deputy governor, Charlie Bean, said yesterrday.
It was not primarily designed to inject more stimulus into the economy, he said, but it should reduce the risk of a premature rise in market interest rates jeopardising the recovery.
“The guidance is intended primarily to clarify our reaction function rather than to inject additional stimulus by pre-committing to a time-inconsistent ‘longer for longer’ policy path,” Bean said.
“Nevertheless, by reducing uncertainty about our behaviour, we are aiming to encourage households and businesses to spend and invest.”
Bean is only the second Monetary Policy Committee to speak publicly since Mark Carney, the central bank’s new chief, announced the bank would not raise interest rates before unemployment fell to 7%.
Bank projections show this threshold is unlikely to be hit before 2016, but money markets show investors are betting UK rates could rise a full year earlier.
Bean, who typically represents the majority view on the nine-strong committee, acknowledged that market rates had risen rather than fallen since the introduction of “forward guidance” — a move he said reflected a string of good news on Britain’s economy.
But he said the unemployment threshold “by serving as a reminder of just how much growth is needed to regain lost ground” should temper the extent of any tightening.
Bean did not comment on whether the recent shift in rate expectations was justified but warned investors against assuming that all central banks would remove stimulus at the same time.
“Although synchronised movements in bond rates is unsurprising given the high degree of substitutability between relatively safe sovereign bonds, synchronisation at the short end of the yield curve is not warranted if cyclical positions differ,” he said.
