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Weale voted against forward guidance – MPC

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  • 14/08/2013
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Weale voted against forward guidance – MPC
One of the Bank of England's top economists voted against the plan to provide forward guidance on interest rates, the Monetary Policy Committee Minutes have revealed.

Academic Martin Weale said he supported adopting forward guidance but wanted a tighter time frame for the ‘inflation knockout’ – a test which could allow the MPC to raise the Bank rate ahead of schedule.

Despite this dissent, eight out of nine members voted for forward guidance. The minutes stated: “In the current exceptional circumstances, the committee agreed that explicit forward guidance should be adopted.

“It provided a way to make the existing monetary stimulus more effective by conditioning agents’ expectations of the future path of Bank Rate on a better understanding of the committee’s reaction function, and thereby should reduce the risk of an unwarranted rise in market interest rates that prematurely tightened financial conditions.”

In June, turbulence in the US money markets led to speculation that interest rates in the UK could be about to rise from historically low levels.

However, the Bank of England’s announcement last week that the Bank rate would stay at 0.5% until the unemployment rate fell to 7% – in effect guaranteeing low rates for years – helped to quell these fears.

According to the Minutes, most MPC members believe the increase in short-term market interest rates has not been matched by the improving economic outlook. However, other members argued market interest rates were not obviously out of line.

While remaining cautious on interest rates, MPC members appeared to be increasingly optimistic about the chances of a sustained recovery. The Minutes highlighted the buoyancy in the housing market and noted the easing of credit conditions setting apart the 2013 growth from a similar period of recovery in 2009.

The report said credit conditions have continued to ease since May: “That had followed the substantial falls in bank funding costs, in part reflecting the Funding for Lending Scheme (FLS). The availability and cost of credit to households and businesses had improved.”

Committee members voted unanimously in favour of the proposition the Bank Rate should be maintained at 0.5% alongside quantitative easing,  the Minutes added.

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