Just as predicted the Bank of England scraps its 7% unemployment forward guidance – credibility of BoE now in tatters
Well this will come as absolutely NO surprise to regular readers, the Bank of England have basically just scrapped its main forward guidance components, namely the 7% unemployment rate, something we said was coming last week:
And at last check the unemployment rate was 7.1% and expected to be below 7% in the next couple of months – at which point the BoE will promptly lower the threshold to 6.5% or dump it altogether – that’s just what central banks do, because rates can never be aloud to rise ever again.
And ‘dump it altogether’ is exactly what they’ve just done (with now some vague reference to 6-6.5% unemployment rate – more on that below).
But before we get to the ‘new-and-improved’ forward guidance, here’s what the BoE said about it’s 7% unemployment rate when Carney et-al launched this ‘new’ policy last year:
In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%
Originally the BoE hadn’t seen unemployment falling below 7% until well into 2015 – but now they expect it to happen in the next few months.
Alongside linking raising interest rates to the unemployment rate falling below 7%, the BoE had ‘knock-outs’ which mean that the below 7% unemployment rate guidance would not apply if certain conditions remained in the economy. Here’s the BoE explaining the knock-outs and those conditions:
The guidance linking Bank Rate and asset sales to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached:
in the MPC’s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target;
Given that the CPI is now back at 2%, this knock-out is clearly not breached.
medium-term inflation expectations no longer remain sufficiently well anchored;
And in their own words inflation expectations are ‘well anchored’.
Or in other words the Bank of England, if they were following their very guidance as they themselves laid out, they should be about to raise interest rates in the next few months.
But forward guidance was NEVER intend to be used by the BoE. Instead, all forward guidance was, and is, ever designed to achieve, is to ‘talk’ interest rates lower without actually having to print more money.
What the BoE didn’t bank on was that their guidance levels would be met so quickly (what? the BoE got their forecasting wrong? never… ever!). But now they have, and the BoE’s bluff has effectively been called – so what do they do? They do what all ‘good’ central planning bureaucrats do – they move they goal posts and give more guidance.
From today’s BoE Inflation Report:
This box provides further guidance on the setting of monetary policy once the unemployment threshold has been reached.
- The MPC sets policy to achieve the 2% inflation target, and, subject to that, to support the Government’s economic policies, including those for growth and employment.
- Despite the sharp fall in unemployment, there remains scope to absorb spare capacity further before raising Bank Rate.
- When Bank Rate does begin to rise, the appropriate path so as to eliminate slack over the next two to three years and keep inflation close to the target is expected to be gradual.
So we’ve gone from ‘less than 7% unemployment’ condition before rates rise, to ‘slack within the labour market’ – which the BoE defines as:
Spare capacity comprises slack within the labour market — one component of which is the gap between the actual unemployment rate and its medium-term equilibrium rate — and slack within companies. Last August, given its assessment that there was substantial slack in the economy, the MPC specified the unemployment rate as the threshold for its policy guidance.
And just what is the medium term equilibrium rate?
Around half of that slack reflects the difference between the current unemployment rate of 7.1% and an estimate of its medium-term equilibrium rate of 6%–61⁄2%.
So basically what the BoE have essentially done, is go from a 7% unemployment rate at which interest rates rise, to a much more vague sounding, equilibrium rate of 6%–61⁄2% – just like we said they would.
When are people going to get that the BoE have absolutely NO intention of ever letting rates rise (this side of some grand reset), and forward guidance is NEVER to be followed, it is merely a way to jaw-bone rates lower, and now that forward guidance has entered the realm of the unspecific, vague and opaque, the BoE will never have to worry about their conditions for a rate hike ever being met. In short it is now
In short, rates are never going up, forward guidance is a complete sham on a par with some street urchin playing three-card monty, compleltly pointless, offers no ‘guidance’ whatsoever, and leaves the remaining razor thin credibility of the BoE in tatters.
Link to this article: : http://www.goldmadesimplenews.com/gold/just-as-predicted-the-bank-of-england-scraps-its-7-unemployment-forward-guidance-credibility-of-boe-now-in-tatters-12512/