We expect the MPC to introduce a form of forward guidance, most likely in August. It is likely that there will be an intermediate threshold. The two indicators we think are the most probable are
nominal GDP growth (with a threshold rate of around 5.5%) or
the unemployment rate (with a threshold rate of around 6.5%).
We expect a break clause, related to inflation risks, but think it will be vague.
So the MPC may introduce forward guidance with a form of words such as:
“Current policy accommodation will be appropriate at least as long as annual nominal GDP growth remains below 5.5%, conditional on inflation expectations remaining anchored close to the MPC’s 2% CPI target. At the current juncture the Committee does not expect nominal GDP growth to reach that threshold until the end of 2015 at the earliest”
Until Carney's arrival analysts have expected monetary policy to remain fairly fixed, with recent Monetary Policy Committee decisions being quite boring in the run up to the arrival of Sir Mervyn King's replacement. Now perhaps things could get more interesting at the BoE.
Carney has argued that forward guidance by a central bank can improve the effectiveness of policy at the zero lower bound. The Bank of Canada introduced forward guidance in 2009.
In the changes to the MPC’s remit in March, the Chancellor asked:
“that the Committee provide in its August 2013 Inflation Report an assessment of the merits of intermediate thresholds. I will respond to the general approach outlined by the Committee in its August Inflation Report confirming whether it is consistent with the MPC’s remit”.
So we think it likely that the MPC will announce a move to forward guidance, with intermediate thresholds, in the August Inflation Report. And the Chancellor is likely to welcome the decision.