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15 Nov

Further clarification of forward guidance

MPC member Martin Weale provided further clarification of the Bank of England’s ‘forward guidance’ policy when he addressed A-Level students at Quintin Kynaston Community Academy in London. Mr Weale explained that the unemployment threshold did not meant that interest rates would automatically be raised if unemployment fell to 7%, only that it will review the situation. He added: “In deciding what to do we will need to take account of how fast unemployment is falling. If unemployment is falling rapidly, e.g. much faster than our central forecast, we will need to consider the risk of holding rates too low for too long. Even with inflation close to target, it is unlikely to be appropriate for rates to remain at their current level until all spare capacity in the economy has been used up.”

He went on to state that ‘the point about relating Bank Rate to unemployment is that we believe that to be the most straightforward indicator of future inflation risks; as I said earlier, we need to be awake to the risks of holding rates too low for too long. Overall, I am comfortable to stick to the guidance we have offered, instead of claiming too much insight about the future. Furthermore it “is perfectly possible that, as time moves on, the right thing to do will be to keep the Bank Rate at ½ per cent even when unemployment has dropped below our seven per cent threshold. As my colleagues have explained, a rise is not automatic. We will do what we have always done; look at the state of the economy and take the most appropriate decision in the light of that.”

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