Bank of England remains reluctant to end monetary policy by committee
Mark Carney hasn't been in the job that long, and it's all change at the Old Lady.
We've now got an unemployment yardstick of 7 per cent and an effective inflation upper limit of 2.5 per cent. But this doesn't kick in properly until 2015. Inflation is already at 2.9 per cent, with unemployment up at 7.8 per cent.
By the bank's own forecasts it says inflation could exceed 2.5 per cent with a probability of 42 per cent in first of 2015.
We're looking for any change in rates to happen around the second half of 2016 (when unemployment is expected to fall towards that new target), and even as late as then the Bank is saying there's a 38 per cent chance of inflation above their new bound.
It's safe to say that there are lots of get outs if the governor changes his mind – as well as supervision by other bodies. The Financial Policy Committee (FPC) gets a say if they think that financial stability is threatened.
The Bank is ever reluctant to give up on ruling by committee, and that discretion means uncertainty for markets.
Other possible targets were dismissed – including real GDP, nominal GDP, or other employment indicators – you can see the Bank's reasoning here.
Ben Southwood, head of macro policy, Adam Smith Institute:
The 'Carney rule', promising low interest rates and the possibility of more quantitative easing (QE) until unemployment is low or inflation rises, is definitely an improvement on the current regime. It gives firms clearer guidance on the future stance of policy, removing some of the uncertainty in the world economy today. I expect it to deal with some of today's demand shortage, and more importantly tomorrow's expected demand shortage.
But unemployment and inflation come from both aggregate demand (which the bank can control) and aggregate supply (which it has essentially no control over). Since neither of these numbers distinguish between changes in supply or demand, the Bank is still fumbling in the dark with its guesses over whether a change in inflation comes from demand (which means it should react) or supply (which means it shouldn't). This means firms are still left guessing, and it means that uncertainty still reigns.
What we really need is a truly rule-based system that takes discretion away from nine 'wise men' and uses market forecasts to create real stability. That system is nominal income targeting.