8 Aug 2013
Flash: BoE forward guidance a nonfactor? – Deutsche Bank
FXstreet.com (New York) - After weeks of anticipation, the Bank of England’s forward guidance came and went with a somewhat lukewarm reaction, notes Macro Strategy Analysts J. Reid and C. Tan at Deutsche Bank.
Key quotes
“By targeting the unemployment rate at 7% the BoE is suggesting that it intends to keep interest rates on hold for quite some time given the BoE itself does not see the unemployment rate falling to 7% during the entire three-year duration of its forecast.”
However, “the forward guidance includes a number of knockout clauses. The first of these knockouts was if the BoE forecast that inflation were 2.5% or above 18-24 months down the line. Secondly, for the guidance to hold, the Bank requires medium term inflation expectations to be no longer sufficiently well anchored, which we think is clearly open to interpretation.”
Finally, “if the FPC thinks there is a significant threat to financial stability then guidance could be ignored – but again this is a judgment call.”
Key quotes
“By targeting the unemployment rate at 7% the BoE is suggesting that it intends to keep interest rates on hold for quite some time given the BoE itself does not see the unemployment rate falling to 7% during the entire three-year duration of its forecast.”
However, “the forward guidance includes a number of knockout clauses. The first of these knockouts was if the BoE forecast that inflation were 2.5% or above 18-24 months down the line. Secondly, for the guidance to hold, the Bank requires medium term inflation expectations to be no longer sufficiently well anchored, which we think is clearly open to interpretation.”
Finally, “if the FPC thinks there is a significant threat to financial stability then guidance could be ignored – but again this is a judgment call.”