Mark Carney arrived as new governor of the Bank of England seven months ago. Britain’s subsequent economic performance has been a success; but the BoE’s monetary policy has failed.
The distinction is important. Since the second quarter of last year, the most important economic indicators have been strong. Output grew 1.5 per cent; unemployment has dropped from 7.8 per cent to 7.1 per cent; and inflation came down to the 2 per cent target from 2.9 per cent. But Mr Carney cannot take the credit for any of this good news; the effect of monetary policy is felt over years, not months.
Meanwhile, the incoming governor’s signature initiative has turned into a shambles. Forward guidance was supposed to bring new clarity to monetary policy by linking future increases in interest rates to a reduction in the unemployment rate below 7 per cent. The BoE did not expect this threshold to be hit until 2016. People would therefore know for certain that rates were on hold for a long time.
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