LONDON: Bank of England Deputy Governor Ben Broadbent said on Wednesday that central bank policymakers should provide forward guidance that can be well understood, striking a different tone to some suggestions that the BoE might ditch guidance altogether. Broadbent said central banks, faced with a changeable economic environment, may want to offer more information about how they intend to react to developments in the economy, known as the reaction function.
Governor Andrew Bailey said in November he could imagine going back to the days of offering no forward guidance after criticism of the BoE’s communications that wrong-footed some investors ahead of the central bank’s interest rate decisions.
“Expectations of future interest rates affect current demand and policymakers clearly have an interest in their behaving appropriately as economic news comes in,” Broadbent said in a speech to the National Institute of Economic and Social Research. There were many ways of doing this, whether in the form of speeches, simulations or even published interest rate paths.
“But whatever the medium, monetary authorities need always to think that the message – not least the point that future policy will depend on how the outlook for inflation evolves – is well understood,” he said.
Broadbent also spoke briefly about the surge in inflation that might reach almost 9% - more than four times the BoE’s 2% target - according to the government’s fiscal forecasters, due mostly to the leap in global energy prices.
“As a big net importer of manufactures and commodities it’s doubtful that the UK has ever experienced an external hit to real national income on this scale,” he said. “From the narrow perspective of monetary policy it will result in the near term in the difficult combination of even higher inflation but weaker domestic demand and output growth.”