Bank links interest rates to unemployment target

 

Bank of England governor Mark Carney: "People need clarity over interest rates"

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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 told the BBC: "We need to provide as much clarity and as much certainty about the path of monetary policy."

Speaking to chief economics correspondent Hugh Pym, he said such guidance was needed "so that people… at home, people who are running businesses, across the UK, can make decisions - whether they are investing or spending - with greater certainty about what is going to happen with interest rates".

He added: "In effect we are saying - 'we are providing guidance on what could happen with interest rates'."

The governor told our correspondent that such a move was needed now "when the recovery is just gathering some steam", and when financial markets might have therefore been expecting an adjustment in interest rates.

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 Bank's guidance is subject to three provisos; breaching any of them would sever the link between interest rates and unemployment levels.

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

Start Quote

The Bank's new guidance makes the difficult trade-offs now facing the MPC more explicit. It does not make them go away ”

End Quote
'Renewed recovery'

Mr Carney said that until the unemployment 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.

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 under way 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."

'Confidence boost'

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.

Start Quote

Home loan rates look likely to be lower for longer”

End Quote

"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.

'Significant caveat'

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 the strategy would be terminated had brought a "significant caveat to the table".

Chart showing the UK unemployment rate since 1993
'Dismay'

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".

George Osborne: "I very much support the decision... [People] are going to have greater certainty"

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.

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.

Housing bubble?

At the press conference where the new policy was announced, members of the Bank's MPC were asked whether they were concerned by claims the government's Help to Buy scheme was fuelling another housing bubble.

The Help to Buy scheme was launched in April 2013 and allows borrowers to take an equity loan from the government worth up to 20% of the price of newly built homes.

That, in turn, enables homebuyers to put down a deposit of as little as 5%.

From January next year, it will be extended to help buyers of existing housing.

Critics claim the scheme is artificially inflating house prices, leading to future problems when the support is withdrawn.

But Bank of England chief economist, Spencer Dale, said it was important to keep the size of the scheme in perspective.

"The current run rate of [Help to Buy] is something like 3% or 4% of total housing transactions," he said.

"It's done its job in terms of encouraging new house building, but the idea that it is somehow fuelling a housing boom doesn't stack up in terms of the numbers."

 

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  • rate this
    +4

    Comment number 265.

    Is he serious?! I have to wait another 3 years before I see a realistic return on my savings? I am sick of being punished for other people's borrowing habits. All this will do is create an attitude of 'why bother' when it comes to saving money which can only lead to more problems in the longer term.

  • rate this
    +2

    Comment number 264.

    @232.Slowerpaceoflife
    Comment number 232 is an Editors' Pick
    Keeping interest rates low makes commom sense by helping house owners
    ---
    They're not house owners though are they?
    They don't own their house, the bank does; they have a loan.

  • rate this
    +2

    Comment number 263.

    #223.JamesStGeorge

    What is you definition of poor? Who exactly are all these poor people with saving accounts which are being eroded by inflation and low interest rates? Common sence tell me the poor by definition don't have much/any savings? If you a poor person with £100k in the bank, your not poor! Are you one of these 'poor' people who squirel away the max ISA allowange every year.

  • rate this
    +1

    Comment number 262.

    i was always confused by the policies by the bank of england, fed reserve, european central bank, IMF and then i found out who owns them and all of sudden it became clear. If you don't know who owns these banks look it up.

  • rate this
    +4

    Comment number 261.

    I thought interest rates were governed by inflation, we have all noticed prices creeping up over the years while wages are stagnant, yet interest charges stay the same, one day we will wake up to the fact we are being conned in everything this government says or does.

  • rate this
    +4

    Comment number 260.

    the interest returned on my ISAs is pathetic and now with rates frozen yet again, my return will continue to be messed up. Pension I am saving for will be nothing when I retire as the majority of the pension pot is accumulated on compound interest.

    Awesome, just screw things up for the next generation.

  • rate this
    +1

    Comment number 259.

    If you're not happy with the return on your money from the bank. Do what I'm doing and invest it in small businesses, there are some really great 'no brainer' government incentives out there e.g. EIS/SEIS and you'll be employing people and helping the country get back on its feet at the same time...

  • rate this
    +1

    Comment number 258.

    Am i reading this right,rates linked to unemployment
    so when 700k zhc jobs are created,rates can rise say 0.25% every 3 months & stop rising when 7% is reached once more because the workers will have no money to pay ,so we see saw between 7% unemployment & say 1.25% interest until balance is restored
    BUT balance can not be restored that way,confidence can not be restored that way

  • rate this
    -3

    Comment number 257.

    Had anybody heard of a zero hour contract until they hit the headlines a few days ago? And has anybodey read the detail that the majority of them deliver enough hours worked to be the equivalent of full employment (by which I mean as many hours as the worker wants). And has anyone thought that their flexibility avoids being laid off in slow times?

  • rate this
    +6

    Comment number 256.

    134.
    Money I would keep it very quiet if I were you as you and the bankers were resposible for all the financial mess that the western world finds itself in. It was accountants who created fraud, corrupt practices, leverage borrowing and tax avoidance and we all now what that did to the economy. If you have any common sense at all I would suggest you claim that you are an hourly paid worker

  • rate this
    +1

    Comment number 255.

    @212 Muumipeikko: So your mortgage costs are now less than half what they were. Meanwhile my savings reduce in value every year.

    Is it really fair that people who worked hard and saved their money instead of spending it on holidays, fancy cars and going out now have to quite literally subsidise people who decided to live on debt?

  • rate this
    +3

    Comment number 254.

    May I also say that the BBC's coverage of the business information is absolutely brilliant

    Well improved in the last 30 years or so.

  • rate this
    +21

    Comment number 253.

    @213.Seanus Maximus
    'Can everyone remember that the whole mess was created by LABOUR, not the Tories.'
    If you go back far enough you will see that Thatcher sowed the seeds with her 'Big Bang' when they deregulated the financial markets. Even Nigel Lawson, Thatcher's Chancellor at the time, admits this.

  • rate this
    -1

    Comment number 252.

    232.Slowerpaceoflife
    and also adopt a more German economic
    -
    First German employees actually have less rights than the UK to allow freedom of movement for companies. I dont see many going for that. Second Germany benefits from being in the Euro artificially keeping its ROE down as it exports (same way China does). We dont have that benefit, Sterling would rise making epxorts more expensive

  • rate this
    0

    Comment number 251.

    46.Pollywollydoodle
    My parents were never rich, but worked hard and saved hard to have a comfortable old-age. Now the return they get on this money is negligible, laughable, worthless. It does not cover inflation, so their cash loses value.
    ---
    And perhaps bought a house which is now valued at 10 times what they paid.

    Sell the house, down size or rent, and live off the capital.

  • rate this
    +9

    Comment number 250.

    Some seem to think we should spend all our savings to help the economy - WHY? If you have massive savings maybe you can. But most savers have only very small amounts they have to eke out. I will say it again - as some people fail to get the message why you find it hard to make ends meet is nothing to do with savings versus credit but low wages, zero hours. These are the things needing addressing.

  • rate this
    +83

    Comment number 249.

    Borrowing will always be encouraged in the UK whilst the banks effectively run it. And they still do.

    Why would saving be encouraged anyway, we're much easier to control if we have to work, claim benefits or better still borrow money from big business.

    The real motives are much bigger than just inflation / growth concerns.

  • rate this
    -2

    Comment number 248.

    All this electioneering by all the parties is not going to fix the tory economic failures in policy which has sporned 25 % unemployment rates in some areas.Clearly the worst will be yet to come with a state sponsored housing bubble and collapse of the Euro zone putting many people on the streets

    He is making a error in believing this is the unemployment rate in the UK certainly the markets don't

  • rate this
    +3

    Comment number 247.

    41.frankiecrisp

    Older people should consider the long game and thank their lucky stars. Baby boomers are artificially wealthy due to a post-war boom that will never be seen again - unless there is another world war.

    This generation, the workers, earners, and savers of today are suffering post that period and will continue to with or without politcial and central bank interference.

  • rate this
    +7

    Comment number 246.

    Meet the new boss - same as the the old boss.

    Well worth that £624k a year salary.

 

Page 45 of 58

 

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