Mark Carney barely settled in at his new job as the governor of the Bank of England before causing a big stir.
In a statement last Thursday, he signalled that interest rates will stay at record-low levels in Britain. That sort of “forward guidance” should be familiar to anyone who has followed his career at the Bank of Canada. But telegraphing future monetary policy (something Carney pioneered), rather than letting rate changes speak for themselves, is new to central banks on the other side of the Atlantic.
After one economist blogged that the statement had “jumped the gun,” CNBC dubbed the new governor “Jump-the-Gun” Carney. But Europe’s investors welcomed the forecast, with the FTSEurofirst 300 Index gaining 2.4 per cent by the day’s close.
Carney wasn’t alone in his policy shift, either. European Central Bank president Mario Draghi actually pre-empted Carney with his own guidance last week, saying he expects rates to hold “at present or lower levels for an extended period of time.”
That doesn’t mean the policy of forward guidance is risk-free. As Carney’s career has proven, it seems to work just fine when banks plan to stay the course. When they warn that policy is about to tighten, however, that’s when markets may start to panic and forward guidance flops.