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
    +5

    Comment number 565.

    What about the real unemployment rate? Don't forget only 70% of the working age population are working, of that 50% work for the government (recycling tax money), a huge % work part time on wages the tax payer needs to top up. About 10% of the working age population supports the whole edifice - including pensions, schools etc. We need REAL jobs

  • rate this
    +6

    Comment number 564.

    528.SubtleQuant

    "What does he need to explain exactly? Carney can control short-term interest rates by setting them."

    He needs to explain why the central bank no longer has a requirement to achieve monetary stability and control over inflation and why inflation has been airbrushed out of the picture in order to meet a target he set and he can actually do very little to control.

  • rate this
    +1

    Comment number 563.

    551.The J Hoovers Witnesses
    542.AndyC555
    "You don't think that's generous?"

    ===

    No. It's just that to which you were, and remain, contractually entitled."


    That's idiotic logic.

    Do you deny that a contract can be generous, or reasonable or unfair?

    Or are you saying no contract can be unfair or generous simply because it is a contract?

  • rate this
    +6

    Comment number 562.

    544. Robert
    Economic recovery is patchy. Here in the south of Scotland we are yet to see the housing market move

    ==

    The housing market (i.e. over-inflated bubble) is they key factor destroying economic growth.

    People are pouring large percentages of their income into there home which gives them little to spend on other things.

    House prices need to drop by a least 20% to revive the economy.

  • rate this
    -2

    Comment number 561.

    Good. From an economic perspective, some long term planning is a good step.

  • rate this
    +22

    Comment number 560.

    Its a policy which will encourage big business even more to take on foreign labour rather than hiring a unemployed Brit if unemployment goes down their borrowing costs go up its madness savers are screwed as well. Bring back Mervin or get Max Keiser in he talks sense. We need normal interest rates normal unemployment rates & a normal inflation rate like post W11 to 1970s.

  • rate this
    +1

    Comment number 559.

    The trick here is how to reduce the debt everyone is carrying, so they can raise interest rates without bankrupting the majority of people in the process.

    At the moment, banks are providing more credit. Putting more people into deaper debt.

    All because the banks were not satisfied with your wages this month, they wanted your next months wages and beyond too.

  • rate this
    +3

    Comment number 558.

    Was there any graph in BoE inflation report/forward guidance report which provides info on the re-election chances of the Tories if they inflate the already inflated housing market?

    Really what happened to BoE independence?

  • rate this
    -2

    Comment number 557.

    HAhahahahahahahahahahahahahahahah.......and breath....hahahahahahahahahahahahahahahahahahahahahahahahahah

  • rate this
    +18

    Comment number 556.

    So the bank offers me 1% interest on my savings while inflation is 2.4%
    The Government taxes me on the interest effectively making the rate 0.8%.
    The Government then gives the banks £375bn (£6700 per person) to encourage them to lend more at 6.5%
    Despite the fact that debt blamed for causing the crisis.
    And they wonder why people are not saving for their old age.

  • rate this
    -2

    Comment number 555.

    @534 Concerned person.
    Most people have mortgages which make up around 35% of their monthly out goings. If interest rates go up many will be paying more like 50% of their income on their mortgages so will have less to spend on goods. As our ecnomy is based on the public consuming, if we consume less employment of people in shops and manufacturing sectors will decrease.
    Does that explain it?

  • rate this
    +2

    Comment number 554.

    Lending bubble here we come....

    The irresponsible can keep on borrowing cheap credit whilst those who have saved and normally could spend from investment income can't as rates are so low.

    It's about time the financial markets were allowed to function / reflect the real economy not be artificially pinned back.

  • rate this
    +3

    Comment number 553.

    #535.MrBigBear

    Savers are also very useful when they get to retirement age and can better support themselves financially without state help. e.g. own their own property, can relieve burden on NHS by using private medical care, give/loan their grandchildren deposit for house, can generally pay their own way during retirement especially since people are living longer retirements nowadays.

  • rate this
    +3

    Comment number 552.

    No mention of those poor suckers whose savings are being stolen. Or of those who're trying to buy an annuity. Seems more and more likely the Tories will win the next election by buying borrowers and bankers votes while throwing savers to the wolves!

  • rate this
    +2

    Comment number 551.

    542.AndyC555
    "You don't think that's generous?"

    ===

    No. It's just that to which you were, and remain, contractually entitled. It reflects the contracts market in your sector at the time. You bought well, it now turns out, perhaps your employer didn't, equally.

  • rate this
    +2

    Comment number 550.

    537.chris ivory
    Yep, you are the only one.
    Do you really think that the boardroom of UK PLCs are preoccupied with planning how they can keep the unemployment rate up, so that interest rates stay low? If so, you know rather less about running a business than you think you do.

  • Comment number 549.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +1

    Comment number 548.

    banks run countries not politicians, they want people in debt all the time thats when they make the max return. They make products cheaply in Asia and then bring them into the west and charge huge mark ups so you have to borrow to buy them.That way the banks win both ways, the businesses come for loans and then the consumer comes for loans, stop buying all of this useless junk, get your life back.

  • rate this
    0

    Comment number 547.

    What are you going to do?

  • rate this
    +1

    Comment number 546.

    M. Carney seem conservative linking unemployment as economic indicator. its too econo-myopic, has no internatnal bearing. We are talking increase in manufact-internatnal trade.Not only tesco jobs. So what to employ all Britain at tesco? Can such income foot our expenses ie military,NHS. Its in-part, not MAJOR solution. Its all about manufacturing and exporting big item-CASH COW+Tesco jobs for all.

 

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