There are two ways to read today’s statement by the Bank of England’s Monetary Policy Committee, accompanying its decision to do no more QE, and leave rates at their agreed floor.
One is that it is advance warning (forward guidance) of forward guidance, to be entered into after the August policy meeting.
However, a different way to read it is as follows. Forward guidance Bank of Canada/Fed style, is, roughly, communication to markets that understood correctly how you behaved previously, (and had formed forecasts of the trajectory of rates away from their floor in the future based on that understanding), stating the intention to leave rates on hold for longer, relative to that previous (and previously understood) behaviour.
MPC could be read as saying something different. (Hold your breath): ‘Even absent any future intention to enter into forward guidance (defined above), markets interpretation of the recent inflow of news and how that would translate into interest rate decisions has been different from ours. We saw that news as corresponding to what we would have expected when we last agreed an inflation forecast in May. At that time the forecast under market interest rates delivered profiles for our goal variables that we were broadly content with. Markets expectations of what we were going to do therefore could be taken as roughly matching what we ourselves thought we were going to do. Our forecasts of what we were going to do have not changed much, (because the activity news has been in line with what we predicted), yet markets’ forecasts of what we are going to do have. They are entitled to their view of course, but provided you believe what we say, you should take our forecast as more accurate.’ This view says nothing about whether forward guidance of the lower for longer variety is needed. And it would be something that those who were not in favour of more monetary stimulus could have agreed to, because it amounts only to saying that the MPC as a whole, though not happy with a further stimulus, didn’t want a tightening either.