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BoE's Weale says hard to quantify impact of forward guidance

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(Globalpost/GlobalPost)

LONDON (Reuters) - The Bank of England's forward guidance policy could raise economic output by as much as 0.75 percent if it succeeds in pushing back public expectations of a first interest rate rise by a year, BoE policymaker Martin Weale said.

But in a speech in London on Wednesday, he warned that the impact of the policy might be limited by the likelihood that it was not fully understood by the public.

Weale was the only member of the nine-strong Monetary Policy Committee to vote against the terms of the forward guidance plan introduced in August. His opposition was based on concern that the move implied a greater tolerance of inflation than was consistent with the BoE's remit.

Britain's central bank said in August it would not even consider raising interest rates from their record low 0.5 percent until unemployment had fallen to 7 percent, as long as inflation did not show signs of getting out of hand.

The knowledge that rates would not rise before the recovery was more established was designed to give businesses and households greater confidence to spend and invest.

Weale said market intelligence the BoE had gathered on the impact of guidance suggested people working in financial markets believed the profile of expected future rates was about 0.25 percentage points lower for the next two years than it would have been without forward guidance.

He said his own model indicated delaying a rate rise from one year ahead to two years ahead had a substantial impact at the present, raising output by between 0.5 and 0.75 percent and the inflation rate by just over a quarter of one percent.

He argued that these numbers were very much upper limits, however, and that the policy's effectiveness would depend on how far it was understood outside financial markets.

"We do not, as yet, have any firm information on how well the policy has been understood," Weale said.

"But, unless people have taken an unusual interest in what my colleagues and I have said about policy, it seems to me likely that the initial effects will be appreciably smaller than the numbers above."

(Reporting by David Milliken and Christina Fincher; Editing by Catherine Evans)

http://www.globalpost.com/dispatch/news/thomson-reuters/131211/boes-weale-says-hard-quantify-impact-forward-guidance