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--Former Policymakers, Experts Divided On Approach, Debate Ongoing
By David Robinson
     STOCKHOLM (MNI) - Most Bank of England Monetary Policy Committee members
oppose publishing a likely path for the policy rate but, as Bank Governor Mark
Carney confirmed Thursday, the next Inflation Report will contain analysis of
where the neutral rate is. However, this idiosyncratic BOE approach splits
opinions among policymakers and academics.
     Charles Goodhart, the monetary economist and former MPC member, told Market
News he supported the majority on the MPC in not wanting to publish a rate path,
as central banks are not good at predicting where the policy rate is heading.
     "Central bankers .. only do a tiny bit better than the average and most of
the time one gets it wrong," Goodhart said.
     "Central banks forecasts even only indicate the direction of change
correctly one and half quarters ahead, after that it is purely random," he said,
adding that it was better to acknowledge not knowing where the policy rate was
heading rather than "pretending knowledge that you do not have."
     The Riksbank and others have repeatedly predicted increases in policy rates
that have not materialized.
     Some of the academic literature, as current MPC member Gertjan Vlieghe has
noted, goes the other way and backs publishing a rate projection.
     One influential monetary policy theorist, US economist Michael Woodford,
backed the Riksbank's position, telling Market News that it need not be
confusing and the approach, used by the BOE, of issuing verbal guidance but not
publishing a rate path itself can fuel confusion.
     "The main argument against publishing explicit forecasts is that the public
might think that this is a promise, that the future has to unfold exactly that
way but .. you can make it explicit why it is contingent on predictive
assumptions and why something you think is the most likely outcome currently
doesn't have to be the thing that happens. One way of doing that, as the
Riksbank does, is publishing multiple scenarios," Woodford said.
     Woodford's work highlights how monetary policy works through rate
expectations, rather than the current level of policy rate, and for him it is
best to be transparent about where policymakers think rates are heading.
     One practical problem with publishing a collective forecast is how to pull
it together from policymakers' diverse views. A dissenting policymaker could
either choose to sway the mean projection or publish a separate dissenting
forecast, leaving the collective forecast untouched.
     Former Riksbank Deputy Governor Lars Svensson stated that this was "not a
problem at the Riksbank. It has been understood that the majority is behind the
forecast published in the Monetary Policy Report after each policy meeting .. it
has been understood that it is a mean forecast."
     He and former colleague Karolina Ekholm often brought alternative (mean)
forecasts to the policy meeting which were published in the minutes.
     Goodhart said he had sympathy with the idea of publishing a neutral rate
assessment, as long as it was made clear it was highly uncertain, but it does
add complexity. With policymakers and academics divided and market participant
critical of the BOE's recent verbal guidance, it is hard to see the issues
settling down any time soon. 
--MNI London Bureau; tel: +44 203-586-2223; email:
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MNI London Bureau | +44 203-865-3812 |