UK: Deloitte Monday Briefing: Another Initiative To Boost Growth

Last Updated: 2 September 2013
Article by Ian Stewart

Most Read Contributor in UK, August 2017
  • In the last five years, policymakers have tried a series of policies to boost growth - from ultra-low interest rates to massive purchases of government debt and programmes to kick start bank lending. The latest weapon to be deployed is forward guidance, an opaque phrase for a policy which aims to convince people that interest rates will stay lower for longer.
  • Earlier this month, the new governor of the Bank of England, Mark Carney, promised that UK interest rates would stay at their current level of just 0.5% until unemployment falls below 7.0%. With the jobless rate at 7.6%, and the Bank not expecting it to fall below 7.0% until late 2016, the message to consumers and business is that low interest rates are here to stay for at least another three years.
  • The European Central Bank adopted a similar policy just before Mr. Carney's announcement, announcing that it expects euro area interest rates to stay "at present or lower levels for an extended period of time". Last December, the US Federal Reserve said that it intended to keep rates low until unemployment dropped below 6.5% (the current jobless rate is 7.4%).
  • Mr. Carney was an early enthusiast for forward guidance. As Governor of the Bank of Canada he pledged, in April 2009, that Canadian interest rates would stay on hold for at least a year.  
  • Forward guidance aims to convince markets that interest rates will stay low. If consumers and business believe what they hear, they are more likely to borrow and more likely to spend, confident that they won't be caught out by an unexpected hike in interest rates.
  • For this to work central banks need to give the impression that they are foreswearing rate rises – even though, in practice, the small print in the central banks' announcement provides room for earlier rate hikes. In the Bank of England's case, the commitment to low rates is contingent on unemployment remaining above 7.0%, inflation expectations remaining contained and monetary policy not posing a threat to financial stability.
  • The adoption of forward guidance in Europe appears, in part, to be a response to rise in European interest rate expectations in the wake of what looks like a bungled announcement by The Fed on Quantitative Easing. Markets took fright, assuming that the Fed statement signals the beginning of the end of low interest rates, not just in the US, but in Europe too.
  • The challenge for forward guidance is to lower interest rate expectations and boost growth without unduly limiting the Bank of England's and ECB's freedom of manoeuvre. Forward guidance is certainly no panacea – it was pioneered in Japan in 1999 and had little discernible effect on growth.
  • At first glance, Mr. Carney's announcement has not had the desired effect. Indeed, long term interest rate expectations in the UK are higher now than they were before Mr. Carney's statement earlier this month. Markets are now betting on the first interest rate rise taking place in the middle of 2015, more than a year ahead of when Mr. Carney's formula implies rates will rise.
  • Paradoxically, this may well be good news and a sign that the market thinks that the economy is on the mend. Markets know that forward guidance gives the Bank plenty of room to raise rates when it needs to. The fact that markets are bringing forward the timing of the first rate hike suggests that they are becoming more confident about growth.
  • The recovery that comes will, we think, owe far, far more, to the policies of Mr. Carney's predecessor, Mervyn King, and to an improved global environment, than to forward guidance. Mr. Carney's good fortune is to take the reins at the Bank when, after five years of disappointments and extraordinary monetary stimulus, a recovery is starting to happen.
  • Napoleon once remarked that he liked his generals to be lucky. It helps in economics too. The signs, so far, are that Mr. Carney has it.


UK's FTSE 100 ended the week down -0.1%.

Here are some recent news stories that caught our eye as reflecting key economic themes:


  • Wolfgang Schӓuble, the German finance minister, claimed that another bailout programme will be necessary for Greece in order to help get the country "over the hill"
  • Global corporate bond issuance fell to its lowest level in 5 years in August, as a result of increased market volatility and rising US Treasury yields
  • US gold exports rose more than 860% between the first half of 2012 and the first half of 2013, driven by increased demand from Asia after the price of gold fell to a near 3-year low in June
  • Official data shows that Britain's train companies for the first time collectively paid back more to the UK government than they received in subsidies for the year 2012/13
  • Business activity in Germany's private sector rose in August at the fastest rate since June 2011, according to purchasing managers data from Markit
  • Employment in London's Canary Wharf financial district has risen almost four-fold between 2001 and 2012, according to data from the Office for National Statistics
  • The UK communications watchdog, Ofcom, is consulting on plans to enable air passengers the ability to use superfast broadband aboard flights, following advances in satellite technology
  • US home improvements firm Home Depot reported a 17% year-on-year rise in earnings in Q2 2013, driven by the improvement in the US housing market
  • Aga Rangemaster reported a 5% rise in sales of its upmarket stoves and cookers in Q2 2013, as a result of the upturn in the London and South-East housing market
  • Swiss chocolate maker Lindt and Sprüngli announced a 9.6% year-on-year rise in sales during the first half in North America – the world's largest chocolate market
  • The number of people living in rural areas fell by 3% globally between 2003 and 2012 according to the World Bank
  • Chinese workers in the Shandong province continued a strike in protest against the decision by their US-employers Cooper Tire to accept a buyout from India's Apollo Tyres
  • Online start-up Pocket Shop launched a venture promising to have groceries with London customers within an hour of clicking "send"
  • Goldman Sachs may have lost millions of dollars after an options trading system malfunctioned and made a series of erroneous trades, according to the Financial Times
  • The Wall Street Journal reports that Hong Kong finance company Yes Lady Finance Co. (translated as "Rich Woman" in Cantonese) accepts luxury handbags as collaterals for personal loans, and recently lent $20,600 in exchange for a Hermès Birkin bag – moneybags

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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