Belfast Telegraph

Tuesday 23 September 2014

Bank of England to soothe rates speculation

Bank governor Mark Carney says policy needed to "evolve"
Bank governor Mark Carney says policy needed to "evolve"

The Bank of England's flagship forward guidance policy linking interest rate decisions to unemployment is widely expected to be tweaked this week.

The guidance pledges that policy makers will not even consider a hike in rates until joblessness has fallen to 7%, but this now looks likely to be achieved much sooner than previously thought.

Bank governor Mark Carney told business leaders in Davos last month that the policy needed to "evolve" with changing circumstances – signalling that this would begin at its quarterly inflation report on Wednesday.

The aim of guidance is to assure households and businesses that the cost of borrowing will remain low for some time, giving them confidence to help the recovery.

When the policy was announced in August, the Bank did not expect the unemployment threshold be achieved until 2016 but since then figures showed the jobless rate had fallen to 7.1%, within a whisker of the target.

But any pressure to increase the cost of borrowing will have been eased by inflation falling to the Bank's target of 2%.

Last week, the latest monthly decision of the Bank's Monetary Policy Committee marked five years at the 0.5% interest rate since it was introduced in 2009.

Experts have speculated that broadening out the terms of forward guidance could include taking into account factors such as real wages – which despite the recovery are still falling as weak pay growth lags behind inflation.

Howard Archer, of IHS Global Insight, said if forecasts in Wednesday's report show inflation at the target rate of 2% or lower over the next two years, it would be a "strong indication that it currently does not expect to be raising interest rates before late-2015 or even 2016".

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