LONDON (Reuters) - The Bank of England’s forward guidance policy will give only a small boost to economic output, and one which depends on how well the public understand it, BoE policymaker Martin Weale said on Wednesday.
Britain’s central bank said in August that it would not raise interest rates from their record low 0.5 percent before unemployment falls to 7 percent, as long as inflation did not show signs of getting out of hand.
Weale said that if this succeeded in pushing back public expectations of an interest rate rise by one year, it could boost gross domestic product by as much as 0.75 percent and increase inflation by just over a quarter of a percentage point.
But the economic impact was likely to be less than this, he said in a speech, as some members of the public would not have taken on board the shift in central bank policy.
“The conclusion I would come to is that the policy has been a modest stimulus, not probably a large stimulus to the economy,” Weale said at the NIESR economic think tank, which he headed before joining the BoE’s Monetary Policy Committee.
Separately on Wednesday, a survey suggested the BoE’s message that interest rates would not rise for a long time was lost on many people in Britain.
Fifty-five percent of households expected the Bank to raise interest rates within the next 12 months, up from 47 percent in November, financial data firm Markit said. Other recent polls have shown lower rate hike expectations.
Weale was the only member of the nine-strong MPC to oppose the terms of the forward guidance plan, and his estimate of the policy’s impact on growth and inflation is the first by an MPC member.
The BoE has estimated that the first 200 billion pounds ($329 billion) of quantitative easing asset purchases, conducted between March 2009 and February 2010 as part of another attempt to boost the economy, lifted growth by 1.5-2.0 percent.
Weale’s opposition to forward guidance was based on concerns that it implied a greater tolerance of inflation than was consistent with the BoE’s remit, and his belief that the economy did not require more stimulus.
However, he said he had been partly reassured by an unexpectedly sharp fall in inflation in recent months. Although a recent rise in public inflation expectations was concerning, it may prove to be a temporary effect of heavy media coverage of planned increases in electricity and heating costs.
The knowledge that rates would not rise before the recovery was more established was designed to give businesses and households greater confidence to spend and invest.
The BoE has stressed that when unemployment, which currently stands at 7.6 percent, falls to 7 percent, this will not automatically trigger an interest rate rise.
Weale said his own decision about whether to raise interest rates would be driven by whether unemployment was falling rapidly - suggesting the economy might be close to overheating - or only reached the 7 percent threshold slowly.
“Our forecasts rightly stress the fact that the future is uncertain,” Weale said.
BoE forecasts last month showed that unemployment could hit 7 percent late next year if interest rates stay unchanged - far earlier than the late 2016 date implied by its previous set of forecasts in August.
Weale said market intelligence the BoE had gathered on the impact of guidance suggested people working in financial markets believed the profile of expected future rates was about 0.25 percentage points lower for the next two years than it would have been without forward guidance. ($1 = 0.6087 British pounds)
Additional reporting by Christina Fincher; Editing by Catherine Evans/Ruth Pitchford