MNI EXCLUSIVE: BOE Neutral Rate Path Transparency Splits Views

--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.

--GUIDANCE CONFUSING

     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.

--RIKSBANK CLEAR

     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: david.robinson@marketnews.com

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