London - The Bank of England (BoE) broke with tradition yesterday, saying it planned to keep interest rates at a record low until unemployment fell to 7 percent or below, which it viewed as unlikely for another three years.
But its attempt to steer expectations about future rate moves and bolster a fledgling economic recovery underwhelmed investors, who brought forward expectations for when rates will rise – the opposite of what the central bank was hoping for.
Mark Carney, who took over as governor just over a month ago, said a recovery in Britain’s economy was under way and appeared to be broadening, but had a long way to go. “We’re not at escape velocity right now,” he said at his first BoE news conference. “This (is) the slowest recovery in output on record.”
The bank said it would consider raising rates if the public’s medium-term inflation expectations rose dangerously high; if it forecast that inflation in 18 to 24 months would be at 2.5 percent or higher; or if ultra-low rates posed a threat to financial stability, possibly a nod to the housing market.
Economists said those caveats raised questions about how long the forward guidance was good for, and could make it harder to understand for households and businesses whom the bank wanted to reassure that borrowing costs would not be rising soon.
Carney suggested he was not concerned, with signs of a recovery in property prices.
The US Federal Reserve launched a similar plan last year to keep its interest rates near zero until unemployment falls to 6.5 percent or inflation expectations top 2.5 percent.
“The forward guidance contained in the inflation report was broadly expected but what was unexpected were the get-out clauses,” Lena Komileva at consultancy G+ Economics said. “The BoE’s pre-commitment to keeping rates at a record low is not as conclusive as it first appeared.”
Carney took over as BoE governor last month, having helped steer his native Canada through the fallout from the financial crisis in 2009 by pledging to keep interest rates low for more than a year.
At the time of his appointment, Britain’s economy was struggling to show growth. Since then, a string of surprisingly strong economic indicators have suggested the country is on the way to recovery.
Carney said the guidance plan was aimed to clarify the central bank’s attempts to help revive the economy, rather than serve as a new stimulus itself.
Adding to Carney’s challenge, some top BoE policymakers have previously expressed concern about tying their hands on monetary policy and potentially risking the bank’s inflation-fighting credibility.
Finance Minister George Osborne, who wants “monetary activism” to offset his austerity push, welcomed the plan and said it was consistent with the government’s “absolute commitment” to Britain’s 2 percent inflation target.
BoE policymakers said they were ready to buy more government bonds if more stimulus was needed and would not reverse existing purchases while unemployment was too high.
Thebank said inflation was forecast to stay above its 2 percent target until the second half of 2015 based on market expectations. It forecast the economy would grow 0.6 percent this quarter. Unemployment would average 7.1 percent in the third quarter of 2016, the end of its forecast horizon.
This implies that it expects to keep interest rates unchanged until at least that time, unless one of three conditions is breached earlier. – Reuters