By Daniel Hunter
Mark Carney, the new governor of the Bank of England, will announced a new 'forward guidance' strategy today (Wednesday).
The new strategy will see the Bank periodically promise to keep interest rates at a particular level, until certain economic conditions are met.
With short-term interest rates already at historic lows, the idea is to reduce longer-term interest rates.
That would give banks and mortgage lenders the ability to 'lock-in' customers at lower rates for longer. At its heart, forward guidance is a tool for boosting confidence.
With the Bank's short-term interest rates at 0.5%, lowering them further is not really an option for stimulating the economy.
Under forward guidance, the Bank is expected to promise to keep interest rates at a set level until other specific economic indicators show improvement.
For example, the Bank could announce that interest rates will stay at 0.5% for a period of time, possibly up to a year, or until the rate of unemployment falls to a certain level.
"Of course the Bank could stick with more QE. But the previous Bank of England minutes and the run of good data suggest it may be sensible to wait and see if the budding recovery is sustained," said Stephen Gifford, Director of economics, in his blog.
"If the economic outlook does deteriorate significantly, the MPC could even look at widening QE’s scope to include high-grade corporate bonds and other safe “growth-enhancing” investments.
"Under current conditions, however, it is probably more appropriate to use or expand existing measures such as the Funding for Lending scheme to target credit issues, specifically to focus on improving the flow to small and medium-sized business.
"One thing Carney is certainly expected to shake up is the culture of the Bank. But an institution which is into its fourth century was hardly likely to move fast on monetary policy.
"Businesses will support any improvements that can be made to transparency and the explanation of its “reaction function”. They also see the merits of some form of forward guidance to keep interest rates low until the economy picks up. We keenly await the Bank’s strategy."
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