Carney to issue clarity on forward guidance

Central bankers must face the music this week and provide more clarity on forward guidance with respect to current monetary policies.

Now that we’ve heard from the Federal Reserve’s Janet Yellen, the stage belongs to the governor of the Bank of England.

Mark Carney previously stated that unemployment would need to drop to 7% before a change in the interest rate was even considered; although this is something that wasn’t anticipated until 2016, UK joblessness is now heading towards that level, and Mr Carney has conceded that he will need to update his former guidance. While the unemployment rate was never to be construed as a formal trigger for hiking interest rates, we may now see Mr Carney moving the goalposts and reduce the threshold figure to 6.5%.

The British economy expanded by 1.9% in 2013 – the fastest GDP growth since the first quarter of 2008 – after a 0.7% growth in final three months of last year. Growth is still below the 2008 peak however, something that will likely be alluded to by the governor in what is expected to be a dovish statement.

The reduction in price pressure coupled with low wage growth has helped to push back market expectations of any monetary policy tightening. Bearing in mind that the key mandate of the Bank of England is inflation and price stability, we may well see a return to more emphasis on this specific area.

This week, the Confederation of British Industry raised its 2014 growth forecast to 2.6% from a November prediction of 2.4%. It lowered its inflation forecast to 1.9% from 2.5% and predicted no interest-rate increase until the third quarter of next year.

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