Home > Bank of England, Monetary Policy > Welcome to the Lost Decade(s)

Welcome to the Lost Decade(s)


The Committee intends at a minimum to maintain the current highly stimulative stance of monetary policy until economic slack has been substantially reduced, provided this does not entail material risks to either price stability or financial stability.

In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%, subject to the conditions below.

Very, very weak.  From the press conference intro:

Today’s Inflation Report contains for the first time, in Chart 5.10 on page 47, the MPC’s projection for unemployment. It shows that, with Bank Rate remaining constant at 0.5% throughout the 3-year forecast period, the MPC’s best collective judgement is that the median unemployment rate at the end of the projection period is 7.3%. Chart 5.11 on page 48, also new in this Report, shows that unemployment is judged by the MPC to be as likely to reach the 7% threshold beyond the three year forecast horizon as before.

The MPC expects to fail.  As with the Fed, we could have unemployment at 8% for the next century and the MPC cannot be judged to have deviated from its guidance.

Markets dropped on this announcement, so this is an effective tightening of policy versus what was expected.  Osborne’s gamble failed.

  1. August 7, 2013 at 11:59

    And it´s even worse because even if unemployment stays above the mark till kingdom come the “knockouts” will very likely be breached!

    “The guidance linking Bank Rate and asset sales to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached:

    in the MPC’s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target;

    medium-term inflation expectations no longer remain sufficiently well anchored;

    the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability that cannot be contained by the substantial range of mitigating policy actions available to the FPC, the Financial Conduct Authority and the Prudential Regulation Authority in a way consistent with their objectives.

  2. August 7, 2013 at 12:13

    And a “killer”:
    WSJ’s Simon Nixon gets the final question. He asks Carney if the BOE would consider its policy a success if house prices rise by 15% next year, as some economists are forecasting. Carney responds that the MPC doesn’t target asset prices. He says the MPC judges success by keeping inflation at the 2% target.!!!

  3. August 7, 2013 at 12:26

    On the inflation knockout, we’re already above 40% probability for the first half of 2015 (Chart 4 in the Overview). A small surge in growth above projection, and we could be triggering it.

  4. James in London
    August 7, 2013 at 12:26

    All is not lost! The associated document on monetary policy trade-offs at least has NGDP as the first alternative discussed, though rejected. I think that is an improvement, even if far short of the goal. MM is on the team sheet, it will be a while yet before it is the star centre forward (or is it “in the squad but not yet on the pitch”).

    The disappointment is palpable. People around me have looked up the current unmeployment rate of just 7.8% and seen it so close to 7% that they are now worrying about the mortgage rates going up, and about having to save more. Good one Mark! And George.

    At least it’s guaranteed not to work and the mortgage rates won’t be going up any time soon.

  5. August 7, 2013 at 12:38

    Back in December MC said that “forward guidance with thresholds” was the “end of the line”. If that didn´t work the target had to change…

  6. Luis Enrique
    August 7, 2013 at 13:11

    can you spell out what you were hoping for (again, probably, I mean – I haven’t been keeping up with your posts recently)

    • August 7, 2013 at 14:01

      Luis – ideally, a commitment to hit a given path of nominal GDP and an open-ended QE program tied to achieving that.

      Most City forecasters I’ve seen were expecting guidance around a 6.5% unemployment rate at least, that’s why the 7% figure is an effective tightening of policy.

  7. Luis Enrique
    August 7, 2013 at 13:30

    and just in case you weren’t going to say, would specifying a much lower unemployment rate have helped?

  8. James in London
    August 7, 2013 at 14:18

    Luis. We were hoping for a nominal target, as that is in the control of the central bank. We were expecting something like that too. But we didn’t get it. All we got was a real target that is not in the central bank’s control, and that can move on all sorts of fundamental changes; to data collection, to work patterns, to real shocks. A nominal target reacts to those sorts of things far less and softens the blows. Inflation is a nominal target too, but only half the story as it is not AD, and it is very difficult to calculate. And politically sensitive, so can’t be adjusted upwards if necessary. And it’s only CPI which is “what consumers face”, but isn’t very related to AD.

  9. Luis Enrique
    August 7, 2013 at 14:48

    thank you both.

  10. August 7, 2013 at 19:59

    Thanks for all the comments, guys. Good catch Duncan. What a depressing day.

  1. August 7, 2013 at 17:16

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