THE BANK of England’s pledge to keep interest rates at rock bottom may be too complicated for families and businesses to understand, losing much of its impact, top policymaker Martin Weale warned yesterday.
If the policy is understood by borrowers, forward guidance could boost the economy by up to 0.75 per cent, the monetary policy committee (MPC) member said.
But he fears it is not clear and so will boost GDP by less than 0.25 per cent.
If it has been understood, “delaying a rate rise from one year ahead to two years ahead has a substantial impact at the present – [my model] suggests output is raised by about 0.5 to 0.75 per cent,” he said. “But, unless people have taken an unusual interest in what my colleagues and I have said about policy, it seems to me likely that the initial effects will be appreciably smaller.”
Under the policy the MPC has pledged to keep interest rates low until the economy is recovering strongly.
Governor Mark Carney has promised not to consider an interest rate hike until unemployment falls to seven per cent or inflation takes off – and possibly holding rates even beyond that.
But critics say the policy is being implemented poorly and may fail to bring the certainty the Bank of England desires.
“The Bank of England is using forward guidance in an inappropriate way,” former MPC member Andrew Sentance told City A.M.
“The natural inclination in a recovering economy is for interest rates to rise, and persuading us that is not going to happen means you’re almost by definition going to face problems of lack of belief and scepticism.”