Tuesday, 10 September 2013

Forward Guidance and its Feel Better Factor

Compass pointing straight ahead, Will Mooney, Carter Jonas partner and head of its commercial agency and professional services in the eastern region, reckons UK plc is more than ready to see where a new road map will take us.

With his dashing good looks which, I am reliably informed by one who should know, can cause a collective Twitter swoon when he’s on the television, the new Governor of the Bank of England appears to have become the poster- boy and superstar of central banking over the summer, while many of his peers will have been sunning themselves on the beaches instead of sweating the statistics.

One month on from taking over from Lord King on 01 July and by 07 August Mark Carney produced and presented a “forward guidance” strategy. As a concept it instantly captured the attention and imagination of the media and business commentators.

The clarity that the simplicity of linking the Bank’s base interest rate with inflation and unemployment targets has, generally, been welcomed by operational business interests too.

The unemployment rate is currently 7.8 percent with the base rate at an historically low rate of 0.5 percent – a level unchanged since March 2009.

Mr Carney and his monetary policy committee cohorts have done much to allay fears that recent, more positive economic data would be the harbinger of an interest rate hike. However, he denied that that 7 percent unemployment or below was a target and preferred to pitch it as a figure at which point the Bank would only consider raising the base rate.

Should the inflation rise to above 2.5 percent at any point in the medium term and his forward guidance states that 7 percent or below unemployment figure is forfeit with 2.5 percent inflation being the more important figure influencing consideration of a possible interest rate rise.

Quantitative Easing (QE) continues until the inflation and/or unemployment thresholds are reached too.

Having such forward guidance about interest rate policies puts the Bank of England on a par with the Federal Reserve and the European Central Bank who, apparently, already have published policies on such matters too. Now we have these too.

It is really important that we don’t lose sight that such low interest rates are not the norm and it is inevitable that they will rise. For some, that will come as a shock.

Picture this: a day in September when the base interest rate rises so quickly in succession from 10 percent to 12 to 15 percent within a matter of hours. That day happened nearly 21 years ago. That day, the 16 September 1992, was ‘Black Wednesday’ and has become the stuff of historical study for economics students and ancient history to a new generation of borrowers.

There was a time when base rates were always in double figures. But have never been above 5 percent since spring 2008. And we all know what happened that autumn.

Yet I shouldn’t be churlish. While ‘Forward Guidance’ is not an economic regime in itself and more of a tactic for abnormal times to get us back to a more normal regime. We’ve had to live what, some years ago, was characterised as the ‘new normal’ for long enough and many of us have had quite enough of it.

Whether a regime or a tactic to give us a road map to sustained recovery remains to be seen but I, for one, am more than happy that Governor Carney’s pronouncement has been part of a summer of positive data which makes it feel as if we’re pointing in the right direction. At last.

Will Mooney MRICS

Commercial, Cambridge

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