Rate rise linked to jobless cuts

Updated: 

Mark Carney

Interest rates will not rise from their record low until more than 750,000 new jobs have been created, the Bank of England pledged yesterday in a radical step to bolster the economy.

Households and businesses were told not to expect rate rises for at least the next three years as new Bank governor Mark Carney said rates will remain at 0.5% until the unemployment rate drops to 7%, depending on stable inflation.


Mr Carney said "a renewed recovery is now under way" in the UK as the Bank hiked its growth forecasts following a flurry of recent upbeat economic figures.

But he insisted the new "forward guidance" strategy of explicitly pinning rate rises to queues at the job centre is vital to help secure Britain's recovery, which remains the weakest on record.
Mr Carney said higher employment and incomes would "represent real improvements in the lives of people across the nation".

Around 2.51 million Britons are unemployed, giving a jobless rate of 7.8%.

Cutting this to 7% would mean "well over three-quarters of a million new jobs" are created, he said.

In his first public address since taking on the top job last month, Mr Carney said: "A renewed recovery is under way in the United Kingdom and appears to be broadening.

"(But) the legacy of the financial crisis means that the recovery remains weak by historical standards."

The Bank also pledged not to scale back its £375 billion economy-boosting programme of quantitative easing (QE) while unemployment remains above the threshold - and could increase asset purchases if the economy suffers a relapse.

It predicted unemployment will remain above 7% until at least the third quarter of 2016 - as far as its current forecast goes.

But the forward guidance came with a number of caveats - or "knockouts" - that could see the Bank take action on rates before unemployment falls to below 7% - including if policymakers fear inflation will be 2.5% or higher in 18 months' to two years' time.

Worries over soaring inflation expectations, or regulator concerns that the approach poses a "significant threat to financial stability", could also see the Bank break its pledge.

Sterling rallied strongly on the brighter economic outlook, but shares were under pressure, with the FTSE 100 Index down 0.8%.

Chancellor George Osborne welcomed the introduction of forward guidance, after asking the Bank to consider it in March.

He said: "For hard-working families thinking of taking out a mortgage or a business, thinking about expanding and taking out a loan to expand, they're going to have greater certainty that interest rates are going to stay low for longer.

"And that is part of our economic plan: to move this country from economic rescue to economic recovery, and so I think it's very welcome news."

Inflation is currently running at 2.9%, but the Bank said it is unlikely to top 3% this year - lower than previous fears of a peak of around 3.5%.

It expects price rises to ease to its 2% target at some point in early 2015.

Growth forecasts were raised sharply higher by the Bank, which said that economic growth will accelerate to 1.4% this year, compared with its previous 1.2% prediction.

Gross domestic product (GDP) will rise to 2.5% next year, instead of 1.7%.

The Bank predicted 0.6% growth between July and September, building on 0.6% growth in the second quarter.

It said it considered a range of measures for forward guidance, including linking rate rises to GDP output.

But Mr Carney said the unemployment rate was chosen for "simplicity and clarity", adding that "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".

The Bank added that the 7% unemployment threshold is not a trigger for rate rises or a target and it is likely it will fall "materially lower" in time.

"Reaching the threshold will not automatically result in a rise in bank rate," it said.

Mr Carney, flanked by fellow MPC members, appear relaxed as he unveiled the policy - unprecedented in the UK - alongside the Bank's quarterly inflation report.

The former governor of Canada's central bank said its "hands are not bound" by the guidance and insisted it is "exactly the time when something like this is appropriate".

"This is the weakest recovery on record," he said.

Interest rates have been at their record low since March 2009, but the Bank follows central banks in the US, Europe, Canada and Japan in turning to forward guidance.

The US Federal Reserve adopted 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.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said the Bank's guidance was a "clear steer that interest rates will stay on hold until the end of 2016 or even 2017" .

"Although financial markets already expected rates to stay low for a long time, this probably exceeds their expectations," she said.

TUC general secretary Frances O'Grady hailed the new policy.

"Today's announcement shows that the Bank understands a real recovery is something that benefits ordinary people, and not just an upward blip in economists' outlooks," she said.

Shadow chancellor Ed Balls said: "By recognising the importance of policy action to support jobs and growth, at last we are seeing the governor show the leadership we have failed to see over the last three years and are still not seeing from the Chancellor.

"Mark Carney is right to warn that the recovery is weak. It is the slowest on record and families are facing a growing cost-of-living crisis."

But there was a mixed reaction from businesses, with the British Chambers of Commerce saying it would give firms a "much-needed confidence boost", but the Institute of Directors arguing it "doesn't really take us forward".

© 2013 Press Association