LONDON The Bank of England's new plan to nurse Britain's economy back to health looks years into the future. But if the recovery keeps on picking up speed it might be put to the test on a monthly basis.
The BoE, under new governor Mark Carney, announced a big change in policy this week when it tied its record low interest rates to a fall in unemployment to 7 percent, something it only expects to happen in late 2016 at the earliest.
The next reading of the unemployment rate comes on Wednesday and is unlikely to show much change from May's 7.8 percent.
Nonetheless, Britain's economy has shown signs that it is recovering more quickly than anyone expected only a few months ago, potentially challenging the BoE's base case that a pick-up in demand won't lead to a surge in hiring.
Rob Wood, a former BoE economist who now works for Berenberg Bank in London, said that while it would take a big change in economic data to undermine the central bank's basic message that higher interest rates remain years away, the new plan will make the monthly unemployment report more important.
"Every release will generate speculation about whether it's coming down faster than the Bank had planned on," Wood said. "Where it will get very testing is if unemployment goes below 7.5 percent over the next six to 12 months."
British financial markets could end up under pressure similar to that in the United States where signs of strength in the economy add to fears among investors of the Federal Reserve speeding up the removal of its bond-buying stimulus.
MINUTES IN FOCUS
Similarly, markets could turn more volatile on the minutes of the BoE's monthly policy meetings.
Some members of the bank's nine-strong Monetary Policy Committee have previously expressed scepticism about deploying forward guidance in Britain, worrying it could eat away at the credibility of the bank's official task of targeting inflation.
The Bank will publish details of the MPC's July 31-August 1 discussion and vote on the new guidance plan at the same time as the unemployment report is released at 0830 GMT on Wednesday. Investors will be watching for any signs of discord.
"That could generate volatility, especially if it is viewed as a marginal or less than unanimous decision," said Francis Diamond, a rates strategist with JP Morgan in London.
Going forward, there is likely to be more interest about whether individual members of the MPC think inflation will be slow to fall, potentially bringing forward a rate hike even before unemployment falls to 7 percent.
The BoE's announcement on Wednesday had the opposite effect on markets than the one the central bank had hoped for. Rather than push back expectations for the timing of a first rate hike, investors brought them forward.
On Thursday, markets were pricing in a first 25 basis-point increase in Bank rate in August 2015, back to where they were before the announcement but about a year ahead of the late-2016 date suggested by the guidance plan.
Economists with some leading banks said they expected markets to start focusing more on the core message that interest rates will stay low for the coming years, even if many felt the 2016 guidance was too far out.
Philip Rush at Nomura stuck to his forecast that rates would rise in February 2015, saying he expected unemployment to fall faster than the Bank predicted - albeit for the gloomy reason that Britain's productivity was unlikely to pick up.
"Every month of strong employment growth now carries the potential for market rate expectations to get pulled forward," Rush wrote in an email to clients on Wednesday.
(Editing by John Stonestreet)