The Bank of England Governor Mark Carney issued his Forward Guidance today, Wednesday 7th August.
The Bank has today given a commitment that it will not raise interest rates from the 0.5% level until at least the unemployment rate, now 7.8%, has fallen to 7%.
This is the new governor Mark Carney’s idea of giving ‘forward guidance’, which gives some forward stability to UK businesses in their future decision making. This was something Chancellor George Osborne requested when he appointed Mark Carney and underlines his policy of giving a clear and stable pathway steer for UK businesses.
It is thought that the 7% threshold will not be breached for at least three years.
There were some caveats but all indications are the interests rates will stay this low for the three years. The monetary policy committee will of course keep a close eye on developments and re-assess if the economy recovers faster than expected.
The Bank puts its inflation target at 2% as a priority, so this could theoretically override this commitment to low rates if inflation takes off.
With positive signs of recovery in the UK economy inflation is a possibility, and as well as this forward guidance on interest rates there will no doubt be upward revisions of GDP over the rest of this year and into next, with 2.4% annual growth being touted for the end of next year.
Given the significant margin of spare capacity in the economy though, Carney sees the way clear for inflation to remain at or near the long term target of 2% and therefore no need to raise interest rates any time soon.
What about more stimuli for the economy through Quantitative Easing, a euphemism for pumping more taxpayer’s money into the economy? It seems Carney feels that if unemployment remains stubbornly high, there could still be room for further asset purchases.
However, with a more positive outlook for the economy it looks like there will be a scaling back of QE if the economy stays on its present “glide path” to a benign and soft landing, hopefully sometime over the next 2 to 3 years.
The Bank of England Report
Mark Carney’s Statement