Unguided

Mark Carney's attempts to introduce "forward guidance" into UK monetary policy just after he arrived at the Bank of England in mid-year attracted a certain amount of skepticism, from market participants and pundits alike.  His decision to tie possible monetary tightening to a specific indicator, the unemployment rate, was widely seen as a hostage to fortune -- and that's how it seems to be turning out.

When Carney showed up on Threadneedle Street, fixed income markets in a number of countries were starting to price in monetary tightening quite aggressively, resulting in rising bond yields.  The trend toward higher rates was triggered by musings from the Fed that it was starting to think about tapering its QE program -- something which, in the event, has not happened yet, and may not now transpire until well into 2014.

Carney's response to a similar emerging trend in the UK Gilts market went beyond anything he had attempted while at the Bank of Canada.  He declared that rather than focusing on growth trends per se, the Bank would closely observe levels of slack in the economy, specifically the unemployment rate.  Other things being equal, the Bank would not begin to tighten its policy settings until unemployment fell to 7%.  Coupled with the Bank's own economic projections, this implied to markets and media alike that the Bank would be on hold until 2016.  Even at the time, however, there were plenty of suggestions that trends in the economy would force its hand much sooner than that.

Fast forward a few months, and the UK economy is growing much faster than the Bank expected -- "robustly", as Carney put it in his latest presentation.  As a consequence, the unemployment rate has already fallen to 7.6%.  Suggestions are now starting to emerge that the economy will overheat unless the Bank starts to tighten in 2014, and most expectations, including the Bank's own,  now seem to be that tightening will come no later than 2015.

However, as this piece from The Guardian suggests, the Bank is keeping its options open -- which can only lead to further doubts about the usefulness of its "forward guidance" in the first place.

As a footnote, back in Ottawa, Carney's successor at the Bank of Canada, Stephen Poloz, seems to have backed away altogether from providing specific guidance to markets about future policy.  Even without such guidance, however, it seems very likely that Canadian rates will stay on hold longer than those in the UK.