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News - 7 August 2013

Bank of England set to unveil new strategy

Mark Carney, the new governor of the Bank of England (BoE), is set to a new strategy of "forward guidance".

With short-term interest rates already at historic lows, the idea is to reduce longer-term interest rates. That would give banks and mortgage lenders the ability to "lock-in" customers at lower rates for longer. At its heart, forward guidance is a tool for boosting confidence.

Tonmoy Kumar, Manager of the Accounts Department of ABDS comments:
“The BoE short-term interest rates are at 0.5%, lowering them further is not really an option for stimulating the economy which is why the Chancellor George Osborne recently requested that the Bank of England consider "unconventional" methods of boosting the economy.”

Under forward guidance, the Bank is expected to promise to keep interest rates at a set level until other specific economic indicators show improvement. For example, the Bank could announce that interest rates will stay at 0.5% for a period of time, possibly up to a year, or until the rate of unemployment falls to a certain level.

Quantitative easing (QE) is another tool that central banks, including the Bank of England, have been using in recent years, a process whereby a central bank buys assets, usually government bonds, in order to pump money into the economy.

However, some analysts feel that QE is losing its effectiveness and that forward guidance will give the Bank of England an extra weapon in its armoury.

Mr Carney and the Bank's Monetary Policy Committee (MPC) gave a taste of forward guidance last month, when it was announced that fears of a rate rise in the near future were
"Not warranted". London shares gained significantly on the comments.

The US central bank, the Federal Reserve, 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.

However, not everyone agrees. Former Bank of England MPC member, Andrew Sentance, said: "This is a very difficult environment for central banks wishing to design forward guidance and we should not build up our hopes about its accuracy or effectiveness."

While Allan Monks, economist at JP Morgan Chase Bank, said that forward guidance can actually create a somewhat "messy" situation.
 
If you need any help and advice for your business on the implications of central and local Government Funding initiatives, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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