BANK of England policymaker Ben Broadbent yesterday came out in support of governor Mark Carney’s policy of forward guidance.
He joined fellow monetary policy committee (MPC) member David Miles who last week gave his backing to the new policy in a speech.
Under forward guidance the Bank of England has said it will not even consider raising interest rates before unemployment falls below seven per cent, a level it predicts is three years away.
The idea is to give firms and households the confidence to borrow and invest knowing rates will be at their record low until a recovery is well and truly established.
However, critics argue the Bank has already let inflation stay well above its two per cent target for several years now, and that the policy shows little regard for prices over the coming years.
Broadbent last night told the London Business School that uncertainty around growth and productivity in the economy means the unusual policy of forward guidance is justified.
“Because productivity growth has been unusually poor, even allowing for the weakness of economic activity, it is hard to be sure how it will behave as the economy recovers,” he said.
“This policy has a number of virtues, not least the reassurance to investing businesses that monetary policy will not rise until economic recovery has become firmly entrenched.”
The MPC member also added to the debate on the so-called productivity puzzle, discussing why unemployment has remained relatively low since 2008 despite the weak economy.
He believes there may have been little reallocation of resources between strong and weak sectors, possibly because of impairments in the financial sector and because of an unusual amount of unproductive firms staying afloat.