The Bank of Japan and The Bank of England Do As Expected

In a well shared secret, the Bank of England released its Inflation statement, which also included its new “forward guidance” policy. Several months ago, Chancellor Osborne asked the Bank of England Board to consider adding “forward guidance” to their decisions and statements. This type of guidance has been adopted by the US Federal Reserve as well as the Bank of Japan. The European Central Bank supports this type of guidance, although the outspoken Mario Draghi gives us this guidance in his press conferences and speeches. The US Fed has recently endorsed a program of public addresses by its members to keep the public well informed about each members views and the thinking of the Fed. But this seems to add confusion to the markets. “Forward Guidance” is just the fashionable method of helping to instill consumer and business confidence.

CNN money reports that Carney said the recovery in activity was broadening but was still the slowest on record. Economic output would not return to its pre-crisis levels for another 12 months, and there were still one million more unemployed. Unemployment currently stands at 7.8% and the U.K. will need to create another 750,000 jobs for the bank’s 7% threshold to be reached.

Carney said reaching 7% unemployment rate would not automatically mean interest rates would rise. It was the level at which the bank would begin to consider removing some of its exceptional stimulus measures — including the £375 billion in asset purchases. The Bank of England increased its forecasts for economic growth in 2013 to 1.5% from 1.2%, and for each of the next two years. It has held official interest rates at a record low of 0.5% since March 2009 and spent £375 billion buying government bonds to help stimulate the economy in the wake of the global financial crisis.

Sterling strengthened after an initial fall, U.K. government bond yields rose and stocks weakened. Investors were betting that the flow of positive economic news means that the unemployment threshold could be reached sooner than expected, or that medium-term inflation targets may be missed — one of three “knockouts” Carney said would make the guidance invalid. The GBP climbed this morning to its highest recent level, trading at 1.5494 as the US dollar continues to weaken trading at 81.35.

Across the Pacific the Bank of Japan, this uses ‘forward guidance” released their most recent decision this morning holding rates and policy at current levels. The JPY has climbed to 96.73. As widely expected, the BOJ maintained its policy launched in April of nearly doubling the monetary base to 270 trillion yen ($2.8 trillion) by the end of 2014 through massive asset purchases to end nearly two decades of deflation. “Japan’s economy is starting to recover moderately,” the central bank said in a statement announcing the policy decision, maintaining its assessment of the economy after revising it upward in July for the seventh straight month according to Reuters. A slew of positive economic data released since the BOJ’s previous meeting had heightened expectations it may offer a rosier view of the economy to say more convincingly that it is recovering. Core consumer prices rose for the first time in more than a year, summer bonuses increased for the first time in three years and the jobless rate hit a 4-1/2 year low.