Mark Carney announces ‘forward guidance’ strategy

10:12am

Mark Carney, who replaced Mervin King as Governor of the Bank of England on July 1st this year, is set to release his first major change to BofE policy today. In an announcement at 10:30am GMT this morning, it is predicted that Carney will reveal a new scheme of ‘Forward Guidance’ whereby the Bank will periodically promise to keep interest rates at a particular level, until certain economic conditions are met.

By doing so, they hope to instill confidence in the economy, encouraging investment. But is there a risk of creeping inflation rates and is that a price worth paying?

Check back soon to get the full breakdown…

10:39am

As expected, Mr Carney has announced ‘explicit state-contingent forward guidance’. This from his opening comments:

“It is now more important than ever for the Monetary Policy Committee (MPC) to be clear and transparent¬† about how it will set monetary policy in order to avoid an unwarranted tightening in interest rate expectations as the recovery gathers strength. That is why the MPC is today announcing explicit state- contingent forward guidance. Our aim is to help secure the recovery, while ensuring that risks to price stability and financial stability are well contained.”

10:59am

The Details

The UK unemployment rate currently stands at 7.8%. The first round of ‘forward guidance’ will establish that interest rates will remain at the historic low of 0.5% until unemployment falls below 7%. Carney said that until that threshold was reached the Bank would not cut back on its ¬£375bn asset purchase programme either.

The Bank’s Quarterly Inflation Report also revised up its 2013 growth forecast from 1.2% to 1.5% and next year from 1.9% to 2.7%.

Overall Predicted Economic and Property Market Impact

In the very shirt term, financiers predict that the FTSE could rise to its highest ever level today on the back of confidence boosting news from the new Governor.

Of more consequence to the wider economy, companies will be able to plan ahead based on reliable and predictable rates of interest and banks will be able to offer customers lower rates on long er deals.

The US central bank, the Federal Reserve, already adopted forward guidance late last year in an attempt to convince companies and households that interest rates would not rise until at least the middle of 2015, at the earliest. This works on the basis that poor confidence and uncertainty in an economy are two of the greatest deterrers to investment – thus a company or household that can accurately predict the state of its finances over time can have the confidence to spend money on, in the company’s case, expanding / investing and, in the household’s case, consuming. Not knowing your financial future typically generates a cautious response, which is not conducive to economic growth.

For the property market, this should act as a catalyst – allowing developers access to long term, cheaper finance and the confidence to take it, which should get sites moving.

For consumers looking to buy property, the stability offered by forward guidance to the banks should give them greater confidence to ‘lock-in’ customers at lower rates for longer. The customer’s decision is also made easier, as the choice between adjustable-rate mortgages and fixed-rate mortgages makes more sense with a stable view of central interest rates, which directly influence lender rates.

The mortgage market is one of the prime focal points of the policy and, on top of the recent progress attributed, at least in part, to the successful¬† ‘Help to Buy’ scheme – proponents hope that ‘forward guidance’ will provide a further boost to kick UK growth into – in the word’s of Mark Carney himself – ‘escape velocity’.

Mr Carney’s opening coments are available in full, here.