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
    +1

    Comment number 625.

    The problem isn't entirely the banks....it began with 'greed' on the part of everyone. Now everyone frustrated/angry. The EU, PC, multiculturalism & we are all in this together. Housing is supply & demand. The owners want the bang for the buck...why not...its just business. Its always someone else's fault. You wanted to believe you were on par with the rich and could have it all....wrong!!

  • rate this
    +4

    Comment number 624.

    618.MrBigBear

    "Do you not read further than the headline?"

    HaHa. Why don't you post a link demonstrating that -

    "zero hour contracts" work very well for the majority of peopl eon them."

    Take your time, you will need it because that evidence does not exist.

  • rate this
    +3

    Comment number 623.

    @609.Robbie

    ......or we could plan for a natural correction of house prices which done over a (not too long) period of time would minimise the more drastic effects of a crash.

    Trouble is though that won't suit banks, btl landlords, the big property portfolio companies and large building firms - wonder who the donation reliant political elite will side with ?

  • rate this
    +1

    Comment number 622.

    589.Killer Boots Man
    3 Minutes ago
    Create 750,000 new jobs to reduce the unemployment rate by 0.8%? Correct me if I'm wrong but those figures don't add up. Are there 93.75million workers in the country?
    +++
    I had the same problem, 2.6m people is 7.8% of the workforce, therefore 750,000 is not 0.8% of the workforce, but of population.

  • rate this
    +1

    Comment number 621.

    Get this man out now... disaster awaits from this policy.
    Either the markets will bring us down or the people will bring down the markets.
    You are paying for the goverment debt and the price of our credit rating
    If the middle class do anything in the next 12 months it should be to send this man shipping, hes running it all for the banks, Welcome to the Corporation of the United Kingdom

  • rate this
    +4

    Comment number 620.

    Remarkably another banker who appears to have learnt nothing from the banker greed led debt and excessively priced property driven recession of just 6 years ago.

    Well not surprising really and He has Gideon Osborne for company who is now crowing about growth based on a property bubble and debt fuel spending!
    Whatever happened to rebalancing the economy?

  • rate this
    0

    Comment number 619.

    So this is the opinion of the people who mis-managed the money we trusted them with in the first place and largely contributed to the financial problems we have now?

    If this is their opinion, I would be tempted to do the opposite (not really, satirical point... you know who you are).

  • rate this
    -11

    Comment number 618.

    @603 Greggers - Do you not read further than the headline? If you had maybe you'd know that "zero hour contracts" work very well for the majority of peopl eon them.

  • rate this
    +3

    Comment number 617.

    600.MrBigBear
    #592 Trick Niggle
    "Savers do not contribute to the economy or to any recovery..."
    /////
    They do contribute to the economy as they do not require state funded housing and other state handouts.

    They are contributing to the recovery as they reduced the amount of bailout money the banks needed from the taxpayer.

  • rate this
    0

    Comment number 616.

    Did I miss the changing brief of the BoE? It will be very interesting to see the gulf form between the treasury, a number of departments and the BoE for he must be looking at formulating policies and managing their implementation or is he just going to play a waiting game.

  • rate this
    +5

    Comment number 615.

    Still screwed unless you're a reckless spendthrift.

  • rate this
    +4

    Comment number 614.

    We are all in it together!

  • rate this
    +12

    Comment number 613.

    QE=increased inflation.

    Stop throwing money at the gambling banks through QE and start investing it in social and affordable house building, business investment and vocational training.

    And does the measure target of 7% unemployment ignore underemployment, part timers, zero hours contracts and the 9 million 'economically inactive', if so, its based on a false measure and has no statistical merit

  • rate this
    +4

    Comment number 612.

    Since there is now no incentive to save savers should unite to remove their money from British banks until such time as interest rates are increased. As we are treated with contempt it's about time we showed the bank of England that without our money to lend the economy would be stuffed.

  • rate this
    +5

    Comment number 611.

    Unemployment at 7.8% ? Really ! Only in Tory fiction books. The figures only include those claiming what used to be called Dole. All other benefits for those not in work are now discounted. The true figures are nearer 7m out of work but want a job & 5m underemployed, those who wish for FT jobs but can't get one.

    Savers, these are the rainy days you were saving for, get used to it ! #ToryFailure

  • rate this
    -1

    Comment number 610.

    "597.The J Hoovers Witnesses
    So the UK has a crap private sector. It's better elsewhere in the EU"

    No it doesn't and no it isn't.

    The private sector accepts that if people spend 20+ years in retirement they can't have the same pensions they did when they averaged 7 years.

    Annuity rates are no higher in other EU countries. You're talking nonsense.

  • rate this
    +39

    Comment number 609.

    Bring on the housing collapse! There is a bubble that needs to burst, and as someone who has been shoved out of the housing market because of grossly inflated pricing I cannot wait for the collapse so I can spend my savings outright on a new home. Sorry to all those who it harms, but what goes around comes around. Bring on the collapse already!

  • rate this
    +5

    Comment number 608.

    @596 The Banterer

    You're kidding right?

    The UK, who sticks our noses into every conflicts around the world, thinks a few billion in foreign aid will bring global stability? The world would be more stable if we kept our troops & foreign aid cash at home.

  • rate this
    +1

    Comment number 607.

    @592.
    Trick Niggle
    Responsible savers would not put all of their savings in to FIAT money.
    Diversifying some savings in to precious metals or stocks that you personally control will give you better inflation protection, when your government issued paper is not not making anything due to interest rates and inflationary pressure. However it's higher risk, and requires the investor to pay attention

  • rate this
    +9

    Comment number 606.

    Which fabricated unemployment figure will be used?, the governments?, or the real one?

 

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