Confusion reigns as forward guidance fails to set out clear interest rate path

Mark Carney wants to give as much info as he can on when interest rates will go up – after more than five years at 0.5 per cent, this is a great big challenge for the Bank of England. He doesn't want to panic anyone.

 

That is one reason why Carney introduced forward guidance, a way to let markets know as much as possible about the conditions under which he will hike rate.

 

Unfortunately, it has not gone quite to plan.

 

First up, he set an unemployment threshold – the monetary policy committee (MPC) said it would not consider rate hikes until unemployment fell below seven per cent. But when unemployment dived, he had to give more detail, which meant becoming less precise.

 

The result is that the Bank will raise rates when the spare capacity in the economy is used up and inflation will start to rise unless action is taken. Unfortunately, that is a very hard concept to measure – deputy governor Charlie Bean yesterday admitted as much.

 

As a result, economists and market analysts have drawn a range of very different conclusions. Some say the announcement yesterday pushed rate rises further away, others expect them sooner and still more have totally different ideas about how this works.

 

These three think a rate hake has been pushed further away.

But these four analysts think rates are going up sooner.

And this one thinks everyone else is wrong – we'll be waiting for a very long time if so.