What is forward guidance?

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It is making a promise about the future, particularly about future interest rates.

The Bank of England, like other central banks, directly controls the short-term interest rate at which it lends to or borrows from the High Street banks overnight.

This is the interest rate that gets set at each of the Bank of England's monthly Monetary Policy Committee meetings.

The Bank has now told the market that it intends to keep this rate at its current historically low 0.5% at least until the unemployment rate falls to 7% or below.

Mr Carney has not said that interest rates will automatically rise when that threshold is reached, rather that it is a "waystation" for further consideration of the issue.

What's the point of forward guidance?

The Bank can only directly control the short-term interest rate. But this rate has already been cut to the lowest level that the Bank feels comfortable with.

Given that it has exhausted the more traditional option of short-term interest rate cuts, another way for the Bank to support the economy has been to offer this indicator, by which companies and mortgage borrowers can estimate for how long such low interest rates may be around for in terms of months or years.

Forward guidance is thus a way of converting low short-term interest rates into lower long-term interest rates.

The thinking is that if the High Street banks can be convinced that they will be able to borrow overnight from the Bank of England at just 0.5% for many nights - indeed many months or years - to come, then they will hopefully be willing to lend money out to the rest of us for the longer term at a commensurately lower interest rate as well.

Is the Bank tying its own hands?

Unfortunately, the Bank cannot actually do that.

Whatever promises it may make now, it will always have the right to change its mind later. Indeed, Mr Carney did exactly this in his time at the Canadian central bank, breaking an earlier promise not to raise interest rates for at least a year.

This inability to tie its own hands presents the Bank with a conundrum - how to convince markets today to believe promises that in the future it may be strongly tempted to renege upon.

I. Vocabulary:

forward guidance – перспективное управление

governor of the Bank of England – глава Банка Англии

set out a forward guidance strategy – изложить стратегию «перспективного управления»

achieve a sustained recovery – добиться устойчивого подъема экономики

government austerity – правительственная политика жесткой экономии

Treasury – Министерство финансов Великобритании

fulfil fiscal role – выполнять бюджетно-налоговую роль

via spending – с помощью расходов

monetary authorities – денежно-кредитные органы

show a penchant for – продемонстрировать склонность к…

under smb’s stewardship – под ч-л руководством

future conduct of monetary policy – проведение денежно-кредитной политики

в будущем

raise interest rates – поднимать учетную ставку банковского процента

undertake further asset purchases – продолжить покупку активов

monetary stimulus – денежный стимул

be warranted – быть оправданным

control short-term interest rates – контролировать краткосрочные

процентные ставки

High Street banks – коммерческие банки (Великобритания)

lend overnight - выдавать краткосрочные

borrow - брать кредиты

set the interest rate – устанавливать процентную ставку

keep the interest rate at its historically low 0,5% - сохранять крайне низкую процентную ставку в 0,5%

reach the threshold – достичь порога

waystation – зд. промежуточный этап

exhaust the option – исчерпать возможность

indicator – показатель

mortgage borrowers – заемщики под залог имущества

commensurately – соизмеримо

tie one’s own hands – связать себе руки

change one’s mind – изменить решение

present the Bank with a conundrum – поставить перед Банком

головоломную задачу

renege on promises – нарушить обещания