Forward guidance uncertainty makes life harder for borrowers

Bank of England governor Mark Carney speaking in London today. Photo: ITV News

The future is impossible to predict but the Bank of England seems to have made it a touch harder still for borrowers.

Governor Mark Carney's great innovation when he was in Canada was to introduce forward guidance.

He did the same in Britain when he delivered his first press conference at the Bank of England in August.

It is a way of taking some of the guess work out of when interest rates may rise by promising not to consider putting them up until unemployment falls (from 7.6% today) to 7.0%.

Three months ago the Bank's forecast was that level would be breached in the middle of 2016.

Using the same methodology, it now - only three months later - thinks that will happen much earlier: there's a 50% chance it might happen by the end of 2014.

This is a full year-and-a-half sooner and means the Bank could, theoretically, put rates up at that point.

If its forecasts vacillate so quickly, how can borrowers plan? It removes, to my mind, the whole point of forward guidance.

The Governor was at pains to point out the threshold is just that: a staging post at which he and his colleagues will consider matters, not necessarily act.

He also highlighted that the same forecasts suggest inflation and economic growth will be benign in the same period, making an "attractive trade-off for a considerable time."

I think that means that he sees no reason, at this stage, to put rates up - so he's trying to help borrowers.

But by reminding them to listen to the regular commentary (like today's press conference) that he and his colleagues give, it means borrowers will themselves have to judge whether they think the economic conditions are such that rates will have to rise.

Most borrowers are not economists. Deciding whether they can afford to borrow has just become more difficult.