U.S. Markets closed

BoE's Miles says 'bizarre' to say forward guidance has failed

By David Milliken

LONDON (Reuters) - A Bank policymaker defended the central bank's guidance on interest rates on Wednesday, saying the recent rise of borrowing costs in financial markets was due to Britain's stronger economic outlook.

David Miles, who earlier this year backed more bond purchases to stimulate the economy, said it was "slightly bizarre" to assume forward guidance had failed because interest rates in financial markets have moved up.

"Some of the (media) interpretation has been this has failed at the outset because (of) the response of market interest rates," he said. "The reason I think this is slightly bizarre is that I think I would interpret to a large extent recent movements in rates as being a reflection of good economic news."

Miles welcomed signs of stronger consumer and business confidence, and faster economic growth, but said that the recovery was only just starting and would take a long time to make a big dent in unemployment.

Earlier on Wednesday official data showed that the unemployment rate fell to 7.7 percent in the three months to July and that the number of people claiming state jobless benefits dropped at the fastest pace since 1997.

Before launching the forward guidance policy in August, the central bank had said that rising financial market interest rates were not justified by economic fundamentals, and has expressed worries about higher rates choking off growth.

But since then it has shied away from commenting on market interest rates and instead preferred to focus on a broader set of financial conditions such as the interest rates banks charge to households and small businesses.

Miles's comments at a finance conference hosted by the University of London echo the support on Monday from Chancellor George Osborne, who earlier this year urged the BoE to reconsider its opposition to forward guidance.

Miles said the guidance helped the public better understand that interest rates were not about to go up as soon as the recovery strengthened and growth returned to or even exceeded its long-run annual average of somewhat over 2 percent.

He also disputed that the guidance had been widely misunderstood as committing the BoE to keep rates on hold for three years, rather than until unemployment falls to 7 percent.

"I think the majority of people have kind of worked out that it does depend on how the economy evolves, and that there is not a cast-iron promise from the Bank that interest rates will not rise until this particular date," he said.

Much British media coverage and analyst comment has focused on the central bank's forecast that unemployment will take at least three years to drop to 7 percent - a timescale markets see as far too long.

Miles also reiterated the BoE's long-standing plan to raise interest rates before starting to sell its 375 billion pounds ($593 billion) of government bonds when the time comes to tighten monetary policy.

($1 = 0.6324 British pounds)

(Reporting by David Milliken, writing by William Schomberg; Editing by Ruth Pitchford)