Sunday, December 3, 2023
HomecommentaryAdjusting forward guidance: What’s the point?

Adjusting forward guidance: What’s the point?

Incredible to believe that in many countries there was once a time when politicians set base interest rates. The independent central bank, pursuing monetary policy without the hindrance of short-term political objectives, is a relatively recent phenomenon. Even the U.S. Federal Reserve, regarded as a benchmark for central banks that don't suffer government interference, is only just past its 100th birthday. This may seem a long time but not when we remember that commerce and some form of money and banking are at least 2000 years old in recorded history.

The Bank of EnglandAndrew Holt | Photographer's Choice | Getty Images

In this timescale the Bank of England (BoE) is a relative newcomer. It only achieved its independent monetary policy mandate in 1997, having been set up in 1694. That's a long time to wait to be allowed to do one's job! And just recently it has adopted the "forward guidance" approach of the U.S. Federal Reserve. Part of this guidance is to announce that interest rates will not be moved until the level of unemployment has fallen to a pre-specified level (with certain caveats).

(Read more: Should the Bank ofEngland abandon forward guidance?)

This column has spoken previously about the wisdom of tying base interest rates to the level of unemployment, so there's no need to discuss that again. This week we're more interested in a news item that suggested that, having indicated that rates would not move until the level of unemployment fell to 7.00 percent (from a current level of about 7.6 percent), the BoE was considering whether that trigger level should be lowered, perhaps to 6.50 percent or so.


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