Minutes away from a new Bank of England
A few quick thoughts before I head into the Bank of England lock-in on forward guidance.
1. The Inflation Report will never be the same again.
Consider it – up until now, these quarterly reports have been hinged on the Bank’s inflation projections. Yes, they have been broad assessments for how the rest of the economy’s doing too but in the end the big question was always whether the Bank would breach its inflation target, and whether it would take action to avoid that. Now that we look likely to move to a world of forward guidance, in practice that shifts us away from those inflation forecasts as the central element. As such…
2. Does this spell the end for the famous “fan charts”?
The inflation fan charts (also known as the rivers of blood, given their colour) have been a mainstay of these events for years, essentially signalling not just the future expected path of inflation but also, by extension, the Bank’s likely actions to bring it down/up. Given forward guidance may rule outthis kremlinological technique of guessing the Bank’s future actions, is there much point in the fan charts any more? Certainly they will be less integral than they used to be.
3. Why not the claimant count?
There’s been much speculation that Mark Carney may use unemployment as a “threshold” associated with forward guidance – eg “we will leave rates low until unemployment drops beneath 6.5% or 7%”. The rational is similar to that in the US: whereas we might quite like to use a broader economic measure – GDP, for instance – it’s a little historical: by the time GDP figures are out the period they cover was about four months ago.
But, I would argue, the same thing applies to the headline unemployment rate in the UK which, thanks to the barmy way the ONS compiles it, is always about two or three months out of date. Plus it’s based on a survey.
So, if you’re after a statistic on the jobs market which is more up-to-date and more reliable, why not use the claimant count – the measure of the number of people on jobseekers’ allowance? Yes, it’s not a comprehensive measure of total joblessness, but it is more timely and is based on an actual head count rather than a survey.
Anyway, no doubt these thoughts will be out of date in a few hours, but stay tuned as we learn the future shape of the UK’s monetary policy framework.