Belfast Telegraph

Saturday 27 December 2014

Carney to defend interest rate plan

Mark Carney is expected to hammer home plans not to raise interest rates for at least three years
Mark Carney is expected to hammer home plans not to raise interest rates for at least three years

New Bank of England governor Mark Carney is expected to hammer home plans not to raise interest rates for at least three years amid growing market scepticism.

Mr Carney will give a speech in Nottingham on Wednesday when he is expected to reaffirm the Bank's commitment not to raise rates from their record low of 0.5% until more than 750,000 new jobs have been created.

Mr Carney unveiled the new policy of "forward guidance" earlier this month, when he said rates will not rise until unemployment has fallen to 7% from its current 7.8% level - which the Bank does not expect until late 2016.

But markets are increasingly sceptical about how long rates can remain at rock bottom as the recovery gathers pace - with second-quarter growth revised up to 0.7% on Friday.

Since forward guidance was introduced, gilt yields have risen to drive up the cost of Government borrowing, while the pound has strengthened, as markets increasingly price in an earlier rate rise.

The Canadian central banker will address an audience from the CBI East Midlands, Derbyshire and Nottinghamshire Chamber of Commerce and East Midlands Institute of Directors, before giving a press conference.

Mr Carney, who replaced Lord King at the head of the Bank in July, is also likely to stress the fragility of the economy, after warning that the recovery is the weakest on record.

The new policy includes a series of "knockouts" or caveats 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 18 to 24 months ahead.

Cracks have already appeared in the new policy after minutes of the Bank's August monetary policy meeting showed members were split on a key part of the scheme. Some members were worried a long timescale could shake confidence in the Bank's commitment to stable price rises - prompting Martin Weale to vote against the new policy.

On unveiling forward guidance, 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%.

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