MPC must improve its communication on forward guidance

10th December 2013

Commenting on the interest rate decision, announced today by the Bank of England's Monetary Policy Committee, David Kern, Chief Economist at the British Chambers of Commerce (BCC) said: -Once again, the MPC did the right thing by holding interest rates and QE.

However as the economy continues to recover, the forward guidance strategy faces challenges due to a change in expectations on interest rates. It is important to remember that most of the doubts around forward guidance are coming from city analysts, whereas most businesses have welcomed its use despite the difficulties of forecasting unemployment. -The MPC can do more to improve its communication on forward guidance. Initially stating in August that the 7% threshold would be reached in 2016 was perhaps too cautious, but the most recent prediction that there is a 40% chance it could be reached by the end of 2014 is too ambitious. The MPC needs to continue its two-pronged approach with forward guidance on interest rates and a firm commitment to lowering inflation. In addition, more emphasis should be placed on improving the flow of finance to SMEs and growing businesses.

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