Bank of England (BoE) governor Mark Carney and his colleagues are debating how they can reflect the strength of the UK economy in forecasts without suggesting that interest rates are about to go up.
Officials are compiling a new quarterly economic outlook, due to be published next week, and reviewing how to guide expectations after unemployment plunged to within a whisker of the threshold for considering an interest rate increase.
Carney says he is in no rush to end emergency stimulus, and the monetary policy committee (MPC) kept the benchmark rate at 0.5 percent yesterday.
Carney faces the biggest test of his credibility since unveiling the flagship policy six months ago, as he seeks to convince households and businesses that the economy has enough spare capacity to extend almost five years of record-low borrowing costs. Officials stress that Britain faces risks from a euro zone economy struggling to gain traction and from emerging market turmoil.
“The strength of the growth story coupled with the robustness of the labour market means that the BoE are likely fighting a losing battle in convincing markets that rate hikes are a distant prospect,” James Knightley at ING Bank in London said. “We are… forecasting a February 2015 move, but the clear threat is that the BoE may be forced into action in the fourth quarter 2014.”
All 57 economists in a survey predicted that the MPC would keep its key rate unchanged yesterday. The MPC also maintained its bond-purchase programme at £375 billion (R7 trillion), as forecast by all 44 economists in a separate poll. Minutes of the decision showing how officials voted will be published on February 19.
The UK economy grew at its strongest pace since 2007 last year, pushing the jobless rate down to 7.1 percent in the three months to November. That is just above the 7 percent level officials identified as the point for thinking about raising rates.
When Carney announced the policy in August last year, unemployment stood at 7.8 percent and the BoE projected it would not hit the threshold until 2016.
The shift has forced Carney to emphasise that 7 percent unemployment is a threshold and not a trigger. – Bloomberg