Bank of England governor Mark Carney has said the Bank will not consider raising interest rates until the jobless rate has fallen to 7% or below. Mr Carney said he expected this would require the creation of about 750,000 jobs and could take three years. The UK unemployment rate currently stands at 7.8%. The governor said this extra clarity was needed to avoid unnecessary fears that interest rates would rise after recent positive economic news. Mr Carney said that the 7% unemployment figure was not a target, but a point at which the Bank of England would re-examine interest rates. The unemployment threshold will hold unless inflation levels threaten to rise too fast or it poses a significant threat to financial stability. Mr Carney said that until the threshold was reached the Bank would not cut back on its £375bn asset purchase programme, known as quantitative easing (QE). The move sees the Bank of England joining both the US Federal Reserve and the European Central Bank in providing so-called "forward guidance" on interest rate policies.
Confidence boost
Recent economic figures and surveys have suggested the recovery in the UK economy is picking up pace.
On Tuesday, official figures showed manufacturing output
surged in June, while surveys have also indicated gathering strength in
the service sector and housing market. While upbeat on the prospects for the UK economy, Mr Carney said it had not reached "escape velocity" yet. "A renewed recovery is now underway in the United Kingdom and it appears to be broadening," he said. "While that is certainly welcome, the legacy of the financial
crisis means that the recovery remains weak by historical standards and
there is still a significant margin of spare capacity in the economy,
this is most clearly evident in the high rate of unemployment." John Longworth, director general of the British Chambers of Commerce, said the forward guidance would reassure firms. "This will give businesses a much-needed confidence boost when looking to invest, as they know that any plans will not suddenly be derailed by a hike in interest rates," he said. Business lobby group, the CBI, echoed this sentiment, saying greater interest rate certainty and clarity from the Bank should provide a shot in the arm for business and households.But Alan Clarke, director of fixed income strategy at Scotiabank, said unemployment could drop below 7% - the rate that would trigger a re-evaluation of interest rates - well before the Bank of England expects.
"Our knee-jerk reaction is that 2016 is a rather conservative assumption," he said. "Our working assumption was that level of the unemployment rate could be reached at least a year earlier." The possibility of an earlier-than-expected rise in rates lifted the pound on the currency markets, with sterling rising by more than a cent against the dollar to $1.5458. 'Knock-out' conditions There had been widespread expectation that Mr Carney would commit the Bank to the new strategy. With short-term interest rates already at historic lows, the aim is to reduce longer-term interest rates. Knowing interest rates could remain low, potentially for years, gives banks and mortgage lenders the ability to "lock-in" customers at lower rates for longer. Stocks fell after the announcement, with Joshua Mahony, research analyst at trading firm Alpari, saying markets had been underwhelmed by Mr Carney's announcement. He added that rules about the circumstances in which strategy would be terminated had brought a "significant caveat to the table".
These so-called 'knock-outs' are:
- CPI inflation is judged more likely than not to be at or above 2.5% over an 18-month to two-year horizon
- inflation looks like it could get out of control in the medium term
- the Bank's Financial Policy Committee judges this stance poses a significant threat to financial stability
The Chancellor, George Osborne, welcomed the move. "I agree with you that forward guidance can play a useful role in enhancing the effectiveness of monetary policy and thereby support the recovery," he said in a letter to the governor. Shadow Chancellor Ed Balls also applauded the decision but warned it would be "very important that the MPC [monetary policy committee] stays vigilant to inflationary risks". But pressure group Save our Savers expressed 'dismay', saying it would cause further hardship for savers and pensioners, while continuing to favour borrowing at the expense of saving. Meanwhile, Graeme Leach, chief economist at the Institute of Directors, said guidance "doesn't really take us forward" and called for radical supply side reforms to bring on a surge in productivity surge. Supply side reforms include lower tax rates and less regulation. The Bank of England's quarterly inflation report was more upbeat about economic growth than it had been in May. It presents its forecasts as a range of possibilities rather than a specific figure, but predicted accelerating growth for the rest of this year, with its central forecast being for growth of about 2.4% in two years' time. It also forecast that the consumer price index (CPI) measure of inflation was likely to be at its target rate of 2.0% during 2015. The rate of CPI inflation increased to a 14-month high of 2.9% in June, up from 2.7% in May.