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 ”

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'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
    -2

    Comment number 1145.

    Commenting here because there is no HYS item on the Scotland part of the "British" Broadcasting Corporation's website

  • rate this
    -2

    Comment number 1144.

    Adam @1141
    "your progeny want the same"?
    Meaning to perpetrate same fraud??

    IF we wish to break the cycle, the supposed 'game' of (unequal) opportunity and sham (NON-representative) democracy, the young need to make common cause with each other, AND with those amongst the older who NOW (if not always) would vote for EQUAL partnership

    Otherwise its 'see you in court', selfish hypocrisies matched

  • rate this
    +9

    Comment number 1143.

    #1136: poor lamb--only 2% on your horde after previous 6%.Very few here will have the slightest sympathy for yor selfish , greedy, Tory ways. Many people today have no pensions, no savings attracting your quite acceptable 2%. Get into the real world, sunshine and stop thinking about your horde when most folk haven't got one and can hardly afford food and housing now. Useless !!!!

  • rate this
    0

    Comment number 1142.

    People go on about how deep the recession is but if you have a job paying a reasonable rate( like a teacher) then there is no recession. I worked part time for Domino's( after I retired ). I was amazed the amount of people who easily order a pizza for £15.99( this is in Salford, the poorest City). There is loads of money in this country. You just need to find it if you can.

  • rate this
    0

    Comment number 1141.

    To all those rich baby boomers who benefited from 100% profit on their houses over the last 30 years - we, your children will now have to pay for your "success". Unlike you, selfish, sanctimonious swine, I am more concerned with the children of the 2000s; your grandchildren. You had it good during the boom; you cretins, for basic jobs. Stop whining when your prodigy want the same.

  • rate this
    +1

    Comment number 1140.

    I find it refreshing that clear parameters have been set - not all may like the policy but now we have something to either agree or disagree with. Previous uncertainty over interest rates month to month has not helped any degree of forward planning - we are off the fence and at least can decide which way to run!

  • rate this
    -1

    Comment number 1139.

    Interest rates are low, very important to dampen inflation, which could involve taxing the very rich and taxing heavily those that outsource jobs, because outsourcing makes the directors, mds, executives very very rich on the cost of unemployment to the masses...who is causing inflation if its not lavish spending by the very rich, something govt. dosnt tell you and always blame other factors

  • rate this
    0

    Comment number 1138.

    'Not by rates alone'
    For maximum, optimal, meaningful, democratic 'recovery', we require only shared desire for such, then the mobilisation of all energies (as able, in equal partnership, the aggregate of our equal incomes stabilising demand), and the deployment of shared capital (in part 'adjusted per capita' to sustain basic infrastructure, countywide; in part strategically, for shared return)

  • rate this
    0

    Comment number 1137.

    Interest rates can't go up, too many people on zero hour contracts. Without the despised unions fighting for us in the early 20th century, then you lot would all be on zero hour contracts, even you Tories amongst us. It would be like working and trying to find work in Dhaka, maybe that's what Osborne means by a flexible labour force. It's disgusting, no other word for it.

  • rate this
    -1

    Comment number 1136.

    Were we not urged in previous decades to save and make provision for our future/pensions etc? I tried to do this and my savings were doing alright until about 3 years ago when I was still getting 6% interest. Now I'm getting 2%. Not too difficult to do the maths on this: it's a 67% drop in income. It affects millions of people with modest savings and is daylight robbery by the banks.

  • rate this
    +1

    Comment number 1135.

    Bad times,good times and everything in between,follow the pattern.
    The facts are.......
    We are paying more for the same or less,
    Our pay is less in real or relative terms.
    The state provides less and you some how have to cover that new hole in the so called safety net even though your paying the same amount in tax & NI, with even less money,big surprise most cant!!!!
    Were not behaving responsibly?

  • rate this
    +4

    Comment number 1134.

    Carney has got it right..interest rates act as a pulse of an economy...if inflation goes up and unemployment is still rife, that means there is inequality in the economy, that is to say there is a very big gap between rich and poor..time to tax the rich or drive them out and uplift the poor to bring a balanced real economy in motion.that will be reflective of an inflation rate, jobs and prosperity

  • rate this
    -1

    Comment number 1133.

    Comment blocked on SF
    JfH@97
    "completely inexplicable"?
    John, we've been through this
    'Point of view', 'conflict of interest', 'sham democracy'?

    The matters you seek to address - the infinity that 'together' our own experiences suggest 'should' be addressed - are beyond practical grasp (in their entirety)probably for all of us

    We are too specialised, too busy. 'Heads down' anyway in fear & greed

  • rate this
    +1

    Comment number 1132.

    Whiy is this myth that Labour screwed the economy still being perpetuated to disguise the present coalition's failures?

    The current crisis was the result of realtors in the US selling toxic debt and banks buying it thinking the underlying asset is going to appreciate.

    This doesn't excuse Labour's failures but it certainly doesn't excuse the failure of this coalition. Nor their blatant cronyism.

  • rate this
    +1

    Comment number 1131.

    Politicians,the electorate we all play draughts,when the effects that will come are known to those that play chess,it's the same as a pre-election tax bribe of a penny less in the £ to pay in tax,the majority vote accordingly,and are shocked by the blindingly obvious tsunami when it arrives!!

  • rate this
    +1

    Comment number 1130.

    The usual smoke and mirrors from the gang in Westminster. The whole gang does only one thing; they look after their own interests. So, whatever they say, I just don't believe. Instead, I expect more of our money to go into the pockets of the politicians and their friends in big business. We really must rid ourselves of these people!!

  • rate this
    +1

    Comment number 1129.

    The longer interest rates stay low, the bigger this problem will become. Maybe this is why the Bank of England & Government keep on putting off increases in interest rates, I think there is a little of heads being buried in the sand here.

  • rate this
    0

    Comment number 1128.

    # 645 the Conservative are turning the economy around after the mess Labour left it in.
    .
    Carney has not so much poured cold water on the UK economy prospects but we have had the slowest output recovery on record and fixing rates until 2016 is not an endorsement of Osbornes fiscal policy. We have a high cost of living,pay packets eroding so people are unlikely to feel better for a while yet

  • rate this
    -1

    Comment number 1127.

    #1120.exstory

    1104. The missing word is 'disposable. The poorest have no (so-called) disposable income.
    /////
    Yes, thank you. You put it better than I did at this late hour!

  • rate this
    0

    Comment number 1126.

    Higher Interest would cripple many households with debts and mortgages who would struggle and eventually go bankrupt losing homes and assets.
    Scam is banks credit corps debt sellers money collectors insolvency practitioners and lawyers who eat up peoples equity in costs.

 

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