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 It could all be in the "dots" — a published matrix of where
rate-setters think interest rates are heading. That, at least, is
one of the things the Bank is expected to ponder.
Central banks, unable to cut rates much below their record low
levels, have resorted to forward guidance, or statements of intent,
to persuade markets and the public they will not raise rates for a
long time as economies struggle back to growth.
The BoE introduced its guidance only six months ago, but it hasn't
worked out as planned.
Britain's unemployment rate has fallen within a whisker of the 7.0
percent level at which the Bank had said it will review interest
rates. That is far sooner than expected, forcing policymakers to
stress they have no plans to hike rates soon.
So Governor Mark Carney has said the Bank will start looking at how
to "evolve" — or in other words, overhaul — guidance this month,
generally taken to mean when it unveils the quarterly Inflation
Report a week on Wednesday.
Although the BoE might not set out in detail how it will expand
forward guidance, the report might at the least offer insight to its
thinking.
While many economists expect it will eventually broaden guidance to
include more economic indicators such as wage growth, it could make
a bigger impact with evolving Fed-style "dot" charts.
The Fed introduced a "dot chart" in its January 2012 economic
projections. Each dot represents the view of an individual
policymaker on how they see the appropriate level of interest rates
for the coming few years.
Those charts seem to have served policymakers on the Fed's Open
Market Committee (FOMC) well.
"The market fully believes what the FOMC has said — that's a great
success for the Fed," said Roberto Perli, a former Fed official
involved in drafting policy and statements, and now partner at
economic research firm Cornerstone Macro.
While the Fed's guidance also centers on an unemployment rate
threshold, it can also rely on these charts to bolster its
low-for-long message on rates — even as the jobless rate falls
towards its own 6.5 percent staging post.
"The market currently is exactly on path with those charts, so it's
hard to argue they've not been so far successful. They act as a
guidepost," said Perli.
By contrast, BoE policymakers have struggled to convince markets
that an interest rate hike is unlikely in 2014.
Goldman Sachs economists Kevin Daly and Sebastian Graves also raised
the prospect of the BoE adopting the Fed's dot charts, in a note to
clients on Monday.
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"We see some attraction in the introduction of Fed-style 'dots', the
most notable being that it would reflect the plurality of views that
exists within the committee," they said.
"Such an approach would also have the advantage of being able to
counter the perception that interest rates are likely to rise soon
after the recovery gets underway."
However, they said introducing them might not be straightforward,
given some policymakers have been reluctant to forecast interest
rates in the past.
EARLY DAYS
Forward guidance is also a relatively new tool, not tested over a
period of years, even if the Fed has been having some success. So
that might act as a brake.
"There's no experience of whether or not those projections are in
line with what the Fed actually does in terms of rate hikes
eventually. We don't know. For now they're just telling us what they
are thinking," said Perli.
Around half the economists surveyed in two separate Reuters polls
have been critical of the BoE's forward guidance, many arguing it
has been too complex.
As well as the unemployment rate threshold, the guidance is subject
to three caveats based on inflation and financial stability. Its
last inflation report contained different sets of forecasts based on
market expectations and constant rates.
When the BoE does overhaul forward guidance, it may do well to
simplify it.
That point was underlined in December by Bank of Japan Governor
Haruhiko Kuroda, who said that central banks offering complicated
messages to markets may have unintended consequences.
"Too complicated forward guidance, or too complicated communication,
could be less efficient and sometimes even disruptive," he said.
(Editing by Jeremy Gaunt)
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