A recovery appears to have finally taken hold, spurred by reduced uncertainty and easier credit conditions. There are good reasons for optimism that the recovery will be durable. But the journey back to full recovery is long and many challenges still remain. Monetary policy is there for the long haul. That is the essence of our forward guidance. 6  BIS central bankers’ speeches  References Haddow, A., Hare C., Holley, J., and Shakir, T. (2013) “Macroeconomic uncertainty: what is it, how can we measure it and why does it matter?”, Bank of England Quarterly Bulletin, 2013 Q2. Ben Haim, J. (2010) “Info-Gap Economics: An operational introduction”, Palgrave McMillan Bloom, N. (2009) “The Impact of Uncertainty Shocks”, Econometrica 77:3, pp 623–685 Bloom, N., Bond, S. and Van Reenen, J. (2001). “The dynamics of investment under uncertainty”, IFS Working Paper, No. W01/05. Bond, S.R. and Lombardi, D (2004) “To buy or not to buy? Uncertainty, irreversibility and heterogenous investment dynamics in Italian company data”, IMF Working Paper no. 04/104. Disney, R, Haskell, J and Heden, Y (2003), “Restructuring and productivity growth in UK manufacturing”, Economic Journal, Vol. 113, Issue 489, pages 666–94. Dixit, A. and Pindyck, R. (1994) “Investment Under Uncertainty”, Princeton University Press Gilchrist, S, Sim, J and Zakrajsek, E (2010), “Uncertainty, financial frictions, and investment dynamics”, 2010 Meeting Papers No. 1285, Society for Economic Dynamics. Lazear, E and Spletzer, R (2011), “Hiring, churn and the business cycle”, NBER Working Paper No. 17910.
The MPC intends not to raise Bank Rate or reduce the stock of asset purchases at least until the unemployment rate reaches a threshold of 7%, subject to three knockouts designed to guard against risks to price and financial stability. But abstracting from the details of these thresholds and knockouts, our message to you – the businessmen and women driving this recovery – is clear. You can plan for the future in the knowledge that the MPC intends to keep interest rates low until we have seen a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher. Based on some of the reporting, you might be forgiven for thinking that forward guidance is far more complicated than this. To take just one example, let me read to you the opening sentence of an article last month reporting on the MPC’s November Inflation Report. Under the headline “Forward guidance fails”, the article began: “The Bank of England now expects the economy to grow strongly next year, highlighting the fact that its policy of forward guidance has effectively failed.” Strong growth, falling unemployment: if that’s failure, I wish I’d failed long before now! The aim of the Committee’s guidance isn’t to provide a commitment that interest rates won’t rise until some particular date in the future. Monetary policy has to respond to the changing state of the economy. We can no more commit to keeping our prices and quantities unchanged irrespective of economic circumstances than you can.