Bank of England warned about the risks of forward guidance

THE BANK of England’s forward guidance policy could encourage investors to take too much risk, Bank for International Settlements (BIS) economists have warned.

A report by Andrew Filardo and Boris Hoffman from the Swiss-based bank said the monetary policy, practised in the UK, Europe, US and Japan, leads investors to believe they will know about any interest rate rise well in advance.

Meanwhile central banks could leave rates too low for too long for fear of market reaction to a rate rise, the report said, leading to “an unhealthy accumulation of financial imbalances”.

The report also said guidance, introduced here by Bank of England governor Mark Carney, can damage a central bank’s reputation.

“If the public fails to fully understand the conditionality of the guidance and the uncertainty surrounding it, the reputation and credibility of the central bank may be at risk if the guidance is revised.”