Base rate is likely to be “materially” below the 5 per cent set on average by the Bank of England prior to the crisis in the coming years – even when the economy recovers.
The minutes for this month’s Monetary Policy Committee, published this morning, suggests base rate will not rise to anywhere near 5 per cent for years.
The minutes say: “When bank rate did begin to rise, it [the MPC] expected that the appropriate path, so as to eliminate slack over the next two or three years and keep inflation close to target, would be gradual.
“The actual path of bank rate over the next few years would, however, depend on economic developments. Even when the economy had returned to normal levels of capacity, and inflation was close to target, the appropriate level of bank rate was likely to be materially below the 5 per cent level set on average by the Committee prior to the financial crisis.”
All members of the MPC voted to keep base rate at 0.5 per cent and the BoE’s programme of quantitative easing at £375bn.
Earlier this month, BoE governor Mark Carney changed how the bank will use forward guidance, just six months after first introducing the policy to the UK, although he maintains the policy has worked so far.
The overhaul of forward guidance sees the direct link with employment dropped so the BoE can focus on a much wider range of indicators focusing on absorbing all of the spare capacity in the economy. This will see the Bank publish forecasts of 18 more economic indicators for the first time.
As well as unemployment, the MPC will monitor factors such as participation in the labour market, average hours worked and the extent of involuntary part-time working, surveys of spare capacity in companies, labour productivity and wages.