LONDON (Reuters) - Bank of England policymakers are seeking to ram home the central message of their new forward guidance policy - British interest rates are not going up any time soon, even as growth accelerates.
Three members of the Bank’s Monetary Policy Committee (MPC)used speeches on Monday and Tuesday to tackle scepticism that the BoE was underestimating how quickly unemployment might fall.
Financial markets have challenged BoE Governor Mark Carney and his policymakers by pricing in a first BoE rate hike much earlier than the late-2016 timeframe suggested by the Bank.
That is when the BoE expects unemployment to fall to the 7 percent level at which it would start to think about raising interest rates from their all-time low of 0.5 percent.
Ben Broadbent, David Miles and Paul Tucker, three of the MPC’s nine members, acknowledged the big uncertainties about British productivity and the possibility that unemployment could in fact fall faster than the Bank’s forecast.
But they also underscored the importance of sending a clear signal now that there was no chance of an imminent rise in interest rates, despite Britain’s economy awakening from a long period of stagnation.
Miles said in his speech “it would be spectacularly misguided to think that some signs of more normal growth mean that the economy is back to normal”.
Broadbent, stressing there was no promise to keep rates on hold until 2016, told his audience that the guidance plan had “a number of virtues, not least the reassurance to investing businesses that monetary policy will not rise until economic recovery has become firmly entrenched”.
Tucker followed up with a similar message at a finance conference, saying it would be easy to jump to the mistaken conclusion that stimulus would be withdrawn soon. “Given the slack in the economy, the Committee is not in a rush,” he said.
Sterling weakened a touch against the dollar on Tuesday, having risen about 6 percent since just before the BoE’s guidance plan was announced in early August, propelled by the unexpected acceleration of Britain’s recovery.
Gross domestic product growth in the second quarter sped up to 0.7 percent compared with the previous three months and a survey of Britain’s private sector was its strongest on record in August.
Britain’s economy is likely growing at an annualised rate of between 2.5 and 3.5 percent based on recent indicators, Miles said on Tuesday, a sudden speeding up from earlier this year.
The push by the BoE to underscore its guidance message comes at a time when investors have questioned how central banks can guide markets through the eventual reversal of their extraordinary stimulus measures.
Last week, the U.S. Federal Reserve defied expectations that it would start to slow down the pace of its bond-buying, pushing share prices up to new heights and pushing down yields on government bonds, including British gilts.
The sense of uncertainty is not likely to go away any time soon for watchers of the Bank either.
George Buckley, a Deutsche Bank economist in London, noted a slide used by Miles to illustrate his speech which showed how Britain’s unemployment rate might range as high as 9.6 percent or as low as 4.8 percent with only relatively small changes in growth and productivity rates over the next three years.
“I think they know about as much as do about how unemployment will behave going forward, which isn’t very much,” Buckley said.
Editing by Pravin Char