Carney's conundrum: To guide or not to guide?

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There wasn't much from the Bank of England's (BoE) meeting last week except for a small statement guiding us towards this week's inflation report. But Wednesday's quarterly forecast will be overshadowed by a decision about forward guidance.

In July, the BoE's Monetary Policy Committee (MPC) said rises in market rate expectations were unwarranted, a statement some likened to "guidance lite" but which the bank then went out of its way to say was not.

So should they go the whole hog now and under what criteria?

The European Central Bank (ECB) shows us how difficult it can be. President Mario Draghi went out of his way to make no mention of dates or specific thresholds which begs the question how much weight such guidance has. Monument Securities has even alluded to it as a confidence trick.

(Read more: Bank of England holds fire before key inflation report)

The MPC will want to avoid that and indeed may decide against doing anything, though that comes with the risk of disappointing investors.

If they do proceed, many believe that linking low rates to a threshold of unemployment, as in the U.S, would be the most likely path. In so doing the bank would also have to argue that to get unemployment down, it would take a more tolerant view to its 2 percent inflation target.

Some, such as Capital Economics, suggest the MPC could go further and make its inflation condition even looser. It has after all, kept rates low despite - at times - expecting inflation to be 0.5 percentage points above target in two years' time.

But if this does happen, and the 2 percent inflation target is subordinated to whatever intermediate target chosen, Monument and others would argue it's the end of inflation targeting and possibly of price stability.

(Read more: ECB's Draghi confirms forward guidance)

In the short term, that might not make much difference as markets currently don't expect the first rate rise until the end of 2015.

But the new governor Mark Carney would also hope this message gets out to the wider public, engineering a confidence that rates won't rise even if the recovery picks up.

Though perhaps this is where the greatest risk lies. For if he succeeds, households may well borrow plenty more. But then what happens if the BoE has to quickly change its mind and raise rates for external reasons? The public would rightly feel it had been duped and, with its finances affected, the political fallout could be messy.

On the face of it forward guidance looks relatively simple. In reality, it is anything but.

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