Forward guidance: the real poison pill
I promised that yesterday’s blog would be my last on forward guidance. Alas it is not to be, because a friend has pointed me towards a detail which, up until now, I hadn’t quite appreciated.
It is this: even if the collective judgement of the Monetary Policy Committee is that the inflation “knockout” will not be reached, any of the nine individual MPC members will still be able to make their own call and, if they want, vote for a rate hike. To put it another way, even if the Inflation Report forecast is that neither of the inflation knockouts have not yet been breached, this still won’t stop MPC members making their mind up separately and voting for higher rates – in fact, it wouldn’t have stopped them from doing so this month(!)
The clause that explains this can be found on page 36 of the document the Bank published explaining its guidance [pdf] but here is a grab of the relevant paragraph:
This considerably undermines the messaging from Mark Carney last week – that “we won’t even begin consider increasing bank rate until the unemployment rate goes to 7%”. And this individual vs collective distinction is important: if the knockouts had been based on the collective forecasting operation entailed in the Inflation Report, it would have made it far more difficult for individual MPC members to vote in favour of hikes – their hands would have been tied.
Apologies if everyone else had already spotted this – but the distinction is an important one, and again helps explain why markets have been rather disappointed by the policy unveiled by the Bank.