Forward Guidance? No, Just More Of the Same
FT Money Supply’s Claire Jones quoted the MPC announcement I referenced in my previous post, and noted the element of “forward guidance”:
The text tells us two things: first, that the MPC is likely to revise up its forecast for inflation, due out next week, to the extent that it shows there is a better chance than that inflation will not remain above the 2 per cent target for most of the forecast horizon. Second, that the MPC is concerned the market will (mis)interpret the forecasts as a signal that the committee will soon tighten policy.
The MPC statement sends a clear signal that policy will remain ultra loose even if inflation remains above for the next couple of years.
Classic forward guidance, then, mixed in with a very “flexible” approach to inflation targeting. The new boss will be pleased.
A reasonable argument, but I’d say two things:
Firstly; repeat after me: when NGDP is growing 10% or 20% a year you have “ultra loose” monetary policy. That is what the 1970s were like. When NGDP is growing 2% per year you have “ultra tight” monetary policy. That is what we have now.
Secondly, when the Bank of England deliberately (or perhaps, accidentally) compresses nominal GDP growth down to 2-3% a year, and it knows it has has done that, and then it says:
The Committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.
What are the markets going to think the Bank means? Roughly that the Bank of England doesn’t think “additional monetary stimulus is warranted” right now when NGDP is growing at 2-3% a year, but maybe if things get a lot worse, they’ll step in.
Here is an analogy. The Bank has driven the car half-way off the cliff, and it’s now dangling precariously over the edge. The Bank does not admit that driving the car half-way off the cliff was an error; it says everything is just fine, and look at that lovely view! Rather than indicating they will do something to remedy a bad situation, they bravely announce… that if the car tips any further forwards, they might shift their weight backwards a bit to prevent things getting worse.
Are you inspired? I’m not.