BOE Forward Guidance Abolished?…Governor Bailey Says "Risk to Central Bank"

[Image source=AFP Yonhap News]

[Asia Economy Reporter Park Byung-hee] Bloomberg reported on the 25th (local time) that Andrew Bailey, Governor of the Bank of England (BOE), the UK's central bank, made remarks implying that the BOE has effectively abandoned the 'forward guidance' policy, which hints at the direction of the base interest rate policy in advance.

Governor Bailey said at an event held at the University of Cambridge that forward guidance is a very risky policy from the central bank's perspective.

According to Governor Bailey, the forward guidance policy was introduced to the BOE in 2013 during the tenure of his predecessor, Governor Mark Carney. At that time, Governor Carney presented forward guidance stating that the BOE could raise the base interest rate once the unemployment rate fell to 7%.

Governor Bailey said, "Forward guidance is very risky, and especially in situations with high economic uncertainty like now, it is even more dangerous."

Governor Bailey explained that instead of the 'hard' form of forward guidance presented by Governor Carney, the BOE recently uses a softer form of forward guidance that fits the reality of increased uncertainty.

Governor Bailey's remarks are interpreted as reflecting the growing economic uncertainty and the resulting difficulties in central banks' monetary policy operations. However, it could also be seen as an excuse to defend himself in relation to the recent incident where Governor Bailey failed to communicate with the market, causing significant turmoil in the UK financial market, which is expected to spark controversy.

The BOE caused confusion in the UK financial market by deciding on an unexpected base interest rate hike at the monetary policy meeting on the 4th of last month. Earlier, on the 17th of the previous month, Governor Bailey said, "The BOE will take action to prevent the spread of inflation expectations." Following this, financial market participants expected the BOE to raise the base interest rate at the November monetary policy meeting. However, the meeting resulted in a decision to keep the base interest rate unchanged, leading to a sharp drop in UK government bond yields. At that time, the market harshly criticized Governor Bailey, calling it an own goal by the BOE that undermined the credibility of the BOE's monetary policy.

Since forward guidance can serve as a means to facilitate communication between the central bank and the market, controversy over Governor Bailey's dismissal of the usefulness of forward guidance seems inevitable.

The BOE will hold its final monetary policy meeting of the year on the 16th of next month.

This content was produced with the assistance of AI translation services.