Interest rates fixed until employment improves says Bank of England

7th August 2013

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The Bank of England has announced that it has no plans to increase interest rates until Britain’s unemployment figures fall below 7 per cent writes Philip Scott.

New governor Mark Carney, while presenting his first inflation report ushered in a policy of “explicit state contingent guidance” whereby he said he would not look to increase the base rate from 0.5 per cent level until the UK’s unemployment rate falls below a 7 per cent threshold, unless inflation rises dramatically or financial stability was under threat. According to official figures the UK’s unemployment rate is presently 7.8 per cent.

In addition he confirmed that until the job numbers target was met, the Bank would not reduce its £375bn quantitative easing programme. 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.”

In regards to inflation, which rose to 2.9 per cent in June, in the Monetary Policy Committes’s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2 per cent target.

In the Committee’s view, a sustained recovery in both demand and supply appears likely.  The report said the outlook for growth is stronger than in May, mainly reflecting a marked improvement in business and consumer sentiment.

Carney said: “In the United Kingdom, a recovery appears to be taking hold.  But the legacy of adjustment and repair left by the financial crisis means that the recovery is likely to remain weak by historical standards.  CPI inflation rose to 2.9 per cent in June and looks set to remain around that rate in the near term.

“A recovery appears to be taking hold.  Early estimates suggest that GDP increased by almost 1 per cent in the first half of 2013.  That is below the pace of growth needed to make material in-roads into the margin of slack in the economy, but is nonetheless welcome after over a year of almost no growth.  Moreover, business surveys and reports from the Bank’s Agents point to a stronger near-term outlook than expected in May.”

At its meeting on 1 August, the Bank of England’s Monetary Policy Committee voted to provide some explicit guidance regarding the future conduct of monetary policy. Its forward guidance policy, mirrors similar tactics used by the Bank of Japan in 1999 and the US Federal Reserve in 2012. Carney also introduced implemented forward guidance at the Bank of Canada in 2009 when he was governor.

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