Forward guidance may undermine the independence of the MPC

Steve Davies appears on BBC World Service

Steve Davies discussed the Bank of England's new forward guidance strategy on the BBC World Service's Business Matters programme.

Steve discussed how the rate of unemployment will now be used as a proxy for the level of underlying economic activity. He argued that using expansive monetary policy to get the economy going is quite dangerous. We should be focusing on supply-side reforms rather than relying on monetary policy.

He explained how the effect of monetaery policy on unemployment levels is quite small, and that there is also the risk of higher inflation and a bubble in the housing market.

In addition, forward guidance may also undermine the independence of the MPC, as their hands our now tied to not raise interest rates until an external indicator allows them to.

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