Mark Carney's revolutionary "forward guidance" on interest rates is so half-baked it could pose a threat to financial stability, a former Bank of England economist has warned.
Richard Barwell, senior European economist at Royal Bank of Scotland, said the central bank's commitment to keep rates at a record low of 0.5% until unemployment drops to 7% was "incomplete" because it did not map out the route back to normal monetary policy, the Sunday Telegraph reports.
Fuller guidance from Carney (pictured), the new governor, would have been more effective because clarity about the timing of a first increase may "quickly give way to increased uncertainty about the rate of ascent" once the economy is motoring, Barwell, a senior economist at the Bank until 2011, said.
Markets might rapidly switch to worrying about inflation, which could become self-fulfilling by "amplifying" the increase in gilt yields and pushing up the price of sterling assets - "leading to a potentially significant financial stability event".
Barwell is not the first to warn of the risk of a new banking catastrophe. Andy Haldane, the Bank's executive director for financial stability, has said: "Let's be clear, we have intentionally blown the biggest government bond bubble in history. That is where we are, so we need to be vigilant about the consequences of that bubble deflating more quickly than we might otherwise have wanted."
The Bank's Financial Policy Committee, on which Haldane sits, is this week expected to address the potential threat from the recent spike in market rates with policy recommendations.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till