Extraordinary measures

This is the final box for my cover story on five years of unconventional monetary policy in Britain. It is essentially a glossary.

Extraordinary monetary policy has in turn spawned a new financial vocabulary. These are some of the main terms.

Forward guidance. An indication by a central bank of how it is likely to react to specified economic developments. For example, shortly after Mark Carney, the new governor of the Bank of England, came into office in August 2013 the monetary policy committee (MPC) said it would not even consider raising interest rates until the unemployment rate touched 7%. In February 2014, after unemployment fell with unexpected rapidity, Carney announced a modified form of forward guidance involving several indicators including productivity growth, household incomes and stronger demand. He also said that the stock of assets already purchased under QE would stay at its present level until interest rates start to rise. Carney first implemented a form of forward guidance as the governor of the Bank of Canada. Back in April 2009 he announced that official interest rates would remain at their low levels, conditional on the outlook for inflation.

The Funding for Lending scheme (FLS). A scheme, introduced in July 2012, to encourage banks and building societies to increase their lending. James Carrick, an economist at LGIM, argues that FLS has in effect taken over from QE as the main way for the Bank to bolster liquidity in the economy.

Macroprudential regulation. A system of managing risks that threaten the financial system as a whole. In the UK it is the responsibility of the FPC. In contrast, the PRA deals with microprudential regulation: setting standards and supervising financial institutions at the level of the individual firm.

QE. A way of injecting money into the economy when official interest rates are close to zero. Although it is often referred to as “printing money” the transactions nowadays are electronic. The Bank of England creates new money that allows it to buys assets, usually gilts but sometimes high-grade corporate debt, from private companies. As a result the seller has more money to spend in the wider economy or to buy other assets.

Whatever uncertainties there are about the impact of unconventional monetary policy one thing is clear. The Bank of England plays a much more extensive role in the economy then it did five years ago. Instead of focusing overwhelmingly on inflation its remit has broadened to include economic growth, financial stability and preventing bubbles.