Policymakers have failed to heed message on guidance

Bank of England chief economist Spencer Dale says policy tightening will probably be slower than after previous recessions and investors may have failed to heed the message of policymakers’ forward guidance.

“If the financial markets are pricing in a sharp rise because they think in the past, every time the economy’s growing quickly the bank’s raised interest rates, I think they should think again,” Mr Dale said at an event in London yesterday.

“Our forward guidance says clearly that’s not the case.”

Bank of England governor Mark Carney introduced guidance in August, saying policymakers will keep the key interest rate at a record low of 0.5%, at least until unemployment drops to 7% from its current standing of 7.7%.

While the central bank forecasts that the threshold won’t be reached until late 2016, investors are betting on a rate increase before then.

Mr Dale also said investors are wrong to link the current policy outlook in the UK with that of the US Federal Reserve just because they have “synchronised” in the past.

“The US is about two to three years ahead of us in terms of the state of their recovery,” he said at the event.

Mr Dale said the Bank of England’s guidance structure reflects uncertainty on the monetary policy committee on the path of recovery and a “best guess that it’s as likely as not” to reach the threshold before the end of 2016.

“What the monetary policy committee has said is ‘we don’t know how quickly and the extent to which productivity will come back, so we’re relatively uncertain about how long interest rates will be kept low’,” he said.

“For that reason I don’t know how big the implicit effective output gap is. By feeding off of unemployment, I can remain agnostic.”