UK: Governor’s rates vow as Bank looks to the future

Bank of England governor Mark Carney during a press conference for the bank's quarterly inflation re

Bank of England governor Mark Carney during a press conference for the bank's quarterly inflation report in London - Credit: PA

Unveiling a new strategy of forward guidance yesterday, the Bank said rates will remain at 0.5% until at least the end of 2016 unless inflation rises sharply.

Mr Carney said that “a renewed recovery is now under way” as the Bank predicted 0.6% growth in the third quarter and said inflation is unlikely to rise above 3% this year - lower than previous fears of a peak of around 3.5%.

The Bank also pledged not to scale back its £375billion economy-boosting programme of quantitative easing (QE) while unemployment remains above 7%. Mr Carney said unemployment falling to 7% would mean more than 750,000 UK jobs are created, which, combined with rising wages, would represent “real improvements in the lives of people across the nation”.

He said the Bank looked at the range of measures in deciding to link rates guidance to unemployment. He added unemployment was chosen as “people running businesses and individuals across the country understand the conditions under which the Monetary Policy Committee (MPC) would begin to consider the withdrawal of stimulus.”

Unemployment is running at 7.8%, according to official figures, and the Bank predicts it will remain above 7% until at least the third quarter of 2016, as far as its current forecast goes. This signals rates will therefore remain at historic lows for at least another three years.

Mr Carney said: “Unemployment is still high. There are one million more people unemployed today than before this financial crisis and many who have jobs would like to work more than they currently can.”

The Bank warned that it will break the link with unemployment if it fears inflation will be 2.5% or higher in the next 18 months to two years - or if there are worries about it climbing sharply in the medium term. Chancellor George Osborne welcomed the introduction of forward guidance by the Bank. But, despite mounting signs that Britain’s recovery is picking up pace, Mr Carney dampened recent hopes that the UK has returned to an economic boom, saying: “We are not at escape velocity right now.”

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The Bank’s interest rates pledge did little to boost market confidence as the FTSE 100 Index fell as much as 1% after the announcement, although the pound gained strength, rising to 1.54 US dollars and 1.16 euros.

The Bank’s move, which was decided at its August 1 rates meeting, sees it follow in the footsteps of the US Federal Reserve, which turned to forward guidance late last year to reassure households and businesses that rates will not rise until at least mid-2015.

America’s central bank said rates would stay at rock bottom as long as unemployment remains above 6.5% and inflation is kept under control.

The Bank’s rates guidance comes amid a flurry of upbeat UK data showing growth across the housing, manufacturing, construction and services sectors.

Growth forecasts were raised sharply higher by the Bank, which said that economic growth will reach an annual rate of at least 2% by the end of 2013, a year sooner than it previously predicted.

Mr Carney said: “There are clear signs that economic activity has strengthened this year.

“But there should be little satisfaction. Much is at stake as we seek to secure this recovery and return inflation to target.”

The Bank’s forecast for third-quarter growth of 0.6% would build on the 0.6% increase in gross domestic product (GDP) seen in the second quarter.

Mr Carney said the Bank chose the unemployment rate for “simplicity and clarity”, opting against tying economic stimulus to other measures, such as gross GDP.

He added: “This is exactly the time when something like this is appropriate.

“We are at the start of a renewed recovery. This is very welcome, but it is after a very sharp recession and a long period of very weak activity.

“This is the weakest recovery on record.”