Economy

Carney Defends BoE’s Forward Guidance on Rates

Bank of England Governor Mark Carney defended the bank’s new policy of forward guidance during his testimony on the quarterly inflation outlook to the Treasury Committee.

In response to concerns that forward guidance on interest rates has caused confusion, Carney explained that it provides market participants with insights into the conditions necessary for the bank to consider raising rates. “What the guidance is doing is giving businesses, households, financial market participants, and parliamentarians perspective on the conditions that must exist in the economy before the Monetary Policy Committee would consider adjusting monetary policy,” he stated.

He noted that financial markets have not priced in an earlier interest rate hike as they might have without the introduction of forward guidance in August.

Carney expressed optimism regarding the drop in the U.K. unemployment rate to 7.6% in the third quarter but emphasized that the bank’s 7% target is merely a threshold for consideration, rather than an automatic trigger for raising interest rates. “The exact timing of when that 7% threshold will be achieved is subject to uncertainty. We do our best to provide estimates of that uncertainty… One month’s unemployment figures do not materially change those likelihoods,” he remarked.

Additionally, Carney mentioned that Chancellor George Osborne had requested a review by the BoE’s Financial Policy Committee regarding the need for additional powers to regulate banks’ capital in relation to their total assets, known as the leverage ratio. He anticipated that this review would take about a year, with hopes for swift action on any new powers thereafter.

Lastly, Carney described recent allegations against the Royal Bank of Scotland, accusing it of forcing small businesses to collapse, as “shocking,” asserting that such matters should be thoroughly investigated and addressed under the law.

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