But the world is complex and people don’t have endless time to devote to understanding monetary policy. In practice, therefore, guidance can be useful in providing people with information about how the MPC sets policy and, over time, in improving understanding of how monetary policy will adjust to news. Guidance thus helps people to think along with the Committee so that their expectations about the path of policy adapt with ours as economic circumstances change. This can make monetary policy more effective by reducing unwarranted volatility in interest rate expectations and the extent to which the MPC has to move Bank Rate to meet the inflation target. The more those expectations are aligned with the policy path necessary to achieve the inflation target, the higher the probability that policy objective will be achieved. Guidance is not a promise of the future path of policy. And its use will not mean that all observers will agree on the likely path of policy for the simple reason that not everyone will agree on the likely path for the economy. However, with guidance, someone who has a different outlook can better anticipate how the MPC will adjust once the scales fall from the Committee’s eyes. Again it is the combination of the economy and the primacy of the inflation target, not the MPC, that ultimately determines that path of policy. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  The MPC’s guidance speaks first and foremost to UK households and businesses.
Bank analysis suggests that Brexit remains the most important driver of short term market interest rates since then (Chart 12). 20  See the written statement to Parliament made by the Chancellor on 20 December 2017, available at www.parliament.uk/ business/publications/written-questions-answers-statements/written-statement/Commons/2017-12-20/HCWS382/. 19  All speeches are available online at www.bankofengland.co.uk/speeches  19  Chart 12: Brexit news has been the main driver of UK interest rates Decomposition of the variance of UK 3-year interest rates since November 2015 Per cent 100  Other  90  Brexit  80  Euo-area data  70  US data  60  UK data  50  Euro-area monetary policy  40  US monetary policy  30  UK monetary policy  20 10 0  Sources: Bloomberg Finance L.P. and Bank calculations. Notes: This decomposition is based on changes in UK 3-year interest rates in 30 minute windows around data releases and monetary policy announcements in the UK, US and euro area, and news about Brexit. Households looked through Brexit-related uncertainties initially. But as the consequences of sterling’s fall showed up in the shops and squeezed their real incomes, they have cut back spending growth to rates about one half of those pre-referendum. Businesses have been somewhere in between. Since the referendum, they have invested much less aggressively than usual in response to an otherwise very favourable environment – with global demand growing strongly, limited spare capacity, relatively high rates of return on capital and the low cost of finance – reflecting the drag from Brexit-related uncertainties.