Do You Trust the Bank?

Just six months after it was introduced forward guidance could be for the scrapheap - so how can the Bank of England regain credibility?

J.P. Morgan Asset Management 30 January, 2014 | 11:48AM
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This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management discusses the future of interest rates.

What a difference six months makes. It was just August that Bank of England (Bank) decided to implement forward guidance. Even then, investors questioned the validity of this policy and of the forecasts underpinning the pledge to maintain low policy rates. Turns out they were right to do so. Six months on and forward guidance could be for the scrapheap as the economy has improved markedly and the unemployment rate fallen far quicker than the Bank mandarins could have imagined. So where can the Bank go from here?

A brief recap. In August 2013, the Bank stated that it would keep the official policy rate at 0.5% until the unemployment rate fell to 7%. At the time, forecasts from the Bank suggested this would happen around the middle of 2016. What the Bank wanted to see was a gradual decline in the unemployment rate as productivity increased and the economy expanded. What transpired instead was that the unemployment rate plummeted from 7.8% at the time of the announcement to 7.1% in the three months to November, with the total number of employed increasing by 373,000. The jobless benefit claimant count figures included in the latest labour report suggest that the unemployment rate will continue to fall and that the unemployment rate may hit 7.0% in the next few months.

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J.P. Morgan Asset Management  is the investment arm of JPMorgan Chase & Co. and it is one of the largest active asset managers in the world.