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Carney: Rates to stay at 0.5% until unemployment drops below 7%

Mark Carney

The Bank of England will keep the base rate at 0.5 per cent until the UK’s unemployment rate falls below 7 per cent unless inflation spikes, governor Mark Carney announced today.

Presenting the latest Inflation Report, Carney introduced a policy of “explicit state contingent guidance” when it comes to the Bank’s monetary stance, with a link to unemployment. He also revealed that quantitative easing will not be unwound while unemployment is above 7 per cent.

The Bank is also prepared to add to QE while the unemployment rate remains above its desired level.

However, Carney added that the monetary policy committee will have to consider rate changes if its inflation forecast goes beyond 0.5 per cent of its target over 18-24 months or if there are any threats to financial stability.

“It is important to be clear that bank rate will not automatically be increased when the unemployment threshold is reached. Nor is 7 per cent a target for unemployment,” Carney said.

“So 7 per cent is merely a ‘way station’ at which the MPC will reassess the state of the economy, the progress of the economic recovery, and, in that context, the appropriate stance of monetary policy.”

The use of forward guidance, which was widely expected by the market, follows similar action by the Bank of Japan in 1999 and the US Federal Reserve in 2012. Carney also implemented forward guidance at the Bank of Canada in 2009 when he was governor.

According to the Office for National Statistics, the UK’s unemployment rate currently stands at 7.8 per cent.

The Bank of England expects median unemployment to stand at 7.3 per cent over the next three years, the Inflation Report shows, meaning the base rate is likely to remain at its historic low throughout the forecast period.

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Carney said: “It is important to stress that forward guidance does not mean the MPC is promising to keep interest rates low for a particular period of time. The path of Bank Rate and asset purchases will, as always, depend on economic conditions.”

When Carney introduced forward guidance at the Bank of Canada, it was linked to a specific date rather than economic conditions. Some critics had suggested that this approach could have the adverse effect of pushing up inflation.

In a letter to the governor, Chancellor George Osborne says: ”Given the exceptional economic challenges continuing to face the UK economy, I agree with you that forward guidance can play a useful role in enhancing the effectiveness of monetary policy and thereby supporting the recovery.

“I take note of the comprehensive arguments the MPC has set out for the choice of an unemployment threshold. I also note the committee’s important approach of allowing the threshold to be ‘knocked out’ if there are material risks to price stability or financial stability.”


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. What an interesting development,linking in base rate to unemployment figures.

    Most of we IFAs would welcome some kind of added incentive for savers who are the people generally who are suffering during the time of an ultra low base rate; but as the father of three children all of whom struggled before eventually securing decent gainful employment I would concede that the Mr Carney’s priorities are sensible.

  2. Interesting, but the fly in the ointment is that we all know that these figures are diddled. How many who are registered unemployed are in fact no such thing? The mere fact that people bleat about immigrants taking jobs points to those who refuse to have realistic expectations of their worth in a free market.

    Yet again those who hold up the economy (like Atlas) are doomed to be shafted for some time yet. The consequence may well be higher equity prices as savers seek income, but with these low interest rates we are still living in Never-Never Land and continuing to blow the bubble. I can recommend today’s Daily Telegraph – Business section – Page B2 – Allister Heath and also the leader. (says it all).

  3. Seems like a steady number being BoE guv. I could do that! I could say link interest rate to unemployment unless something happens to stop it being linked to unemployment. How do you get that job? And how much do you get paid for emitting such profundities? Dang me. I could do that!

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