Mr Carney Gives Forward Guidance

The new Governor of the Bank of England, Canadian national Mark Carney has signalled that Bank of England interest rates are to remain on hold until after the recovery has kicked in sufficiently to bring UK unemployment down below 7% from its current level of 7.8%. This announcement is an example of forward guidance which we discussed earlier this week. The intention is to give the business community the greatest degree of certainty possible about future monetary policy to allow them to plan effectively and to reduce volatility in the markets.
Mr Carney will want to see approximately 750000 new jobs being created before easing off the accommodative monetary stance that was adopted by his predecessor Sir Mervin King. As he pointed out himself, this extent of job creation could take 3 years to accomplish, so interest rates are unlikely to rise in the UK before the second half of 2016. Rates have been unchanged now for four and a half years with the bank’s interest rate at 0.5%, a record low. The longest period without a rate change was 12 years covering World War II and the period of austerity that followed.
The Governor explained that 7% was not a target figure for unemployment, but rather the level at which the Bank of England would take stock of the situation. The only unforeseen factor would be if inflation levels became unacceptable or were to pose a threat to financial stability – then interest rates would rise to choke inflationary pressure off. He also said that the Bank of England would continue with its Quantitative easing programme until the threshold was reached.
He noted: "A renewed recovery is now underway in the United Kingdom and it appears to be broadening. 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."