By Andy Bruce and William Schomberg
LONDON (Reuters) -Bank of England Deputy Governor Ben Broadbent said on Wednesday that policymakers should be clear about how they plan to react to changes in the economy, but he warned against types of guidance that risked being viewed as promises about the future.
The BoE wrong-footed many investors last year over its next moves on interest rates, prompting officials to take stock of their communication strategy.
Governor Andrew Bailey said in November he could imagine going back to the days of offering no forward guidance.
Broadbent, in a speech marking the 25th anniversary of the Monetary Policy Committee, said there was value in guidance which clearly explained how the BoE planned to react now to incoming news on the economy.
But he was sceptical about other forms of guidance.
Attempts by a central bank to steer expectations about how it might react in future - such as by publishing a plan for future interest rates - risked being viewed as promise, with a cost to credibility when things pan out differently.
He said the BoE's first attempt at forward guidance in 2013 under former governor Mark Carney - which linked future interest rate moves to the unemployment rate - was too convoluted.
"Expectations of future interest rates affect current demand and policymakers clearly have an interest in their behaving appropriately as economic news comes in," Broadbent said in his speech at the National Institute of Economic and Social Research, a think tank.
There were many ways of doing this, whether in the form of speeches, simulations or even published interest rate paths.
"But whatever the medium, monetary authorities need always to think that the message – not least the point that future policy will depend on how the outlook for inflation evolves – is well understood," Broadbent said.
Answering questions after his speech, he said research showed people could understand even conditional communications over policy if they were rooted in the real world.
"But the more abstract they are, they fail to come across and I think (the forward guidance in 2013) was one which was didn't pass muster," Broadbent said.
"And so I think that is that is a lesson that they really have to be clear."
Broadbent also spoke briefly about the surge in inflation that might reach almost 9% - more than four times the BoE's 2% target - according to the government's fiscal forecasters, due mostly to the leap in global energy prices.
"As a big net importer of manufactures and commodities it's doubtful that the UK has ever experienced an external hit to real national income on this scale," he said.
"From the narrow perspective of monetary policy it will result in the near term in the difficult combination of even higher inflation but weaker domestic demand and output growth."