The combination of November’s further sharp fall in unemployment and hints from the Governor of the Bank of England suggest that the Monetary Policy Committee’s policy of formal, state-contingent, forward guidance might be about to expire just six months after its adoption. But forward guidance is not completely dead. Rather, the MPC looks likely to move towards a less formal version such as that employed by the ECB and latterly adopted by the US Fed. If this allows for a wider assessment of economic conditions and inflation prospects, it should reduce the dangers of a premature tightening of policy that would threaten to de-rail the economic recovery.
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