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Bank of England ties interest rates to unemployment rate in forward guidance

BoE Governor Mark Carney announced the so-called forward guidance alongside more bullish economic growth forecasts.

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Bank of England Governor Mark Carney holds his first BoE news conference in London on August 7, 2013. (Pool/Getty Images)

The Bank of England said Wednesday it would not consider raising the record-low short-term interest rate of 0.5 percent until the UK unemployment rate fell to 7 percent or below, which it doesn’t expect to occur for three years.

The jobless rate stood at 7.8 percent between March and May. 

It was the first time Britain's central bank had adopted Federal Reserve-style “forward guidance,” which is designed to give households, businesses and investors a clearer steer on future interest rate movements, thus enabling them to make long-term investment decisions. 

But BoE Governor Mark Carney, who took the helm of the central bank last month, said the forward guidance was conditional.

The short-term interest rate, which helps determine long-term interest rates for mortgage borrowers and businesses, could be raised earlier if inflation expectations got out of control or record-low borrowing costs posed a threat to the country’s financial stability, he said.

More from GlobalPost: What is 'forward guidance'

The central bank also indicated it was ready to loosen monetary policy if required. Carney said the world's sixth-largest economy was recovering from the Great Recession, but it had not yet reached “escape velocity.”

"A renewed recovery is now under way in the United Kingdom and it appears to be broadening," the former Bank of Canada governor told reporters at his first BoE news conference. 

"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," said Carney, the first foreigner to lead the BoE.

Wednesday's highly anticipated forward guidance was issued alongside the BoE’s quarterly inflation report, which was more bullish on the economic outlook than the report published three months ago.

The central bank now forecasts Britain's annual economic growth rate to reach 2.6 percent in two years’ time, compared with 2.2 percent forecast in May, while inflation is expected to reach the target of 2 percent in mid-2015.

http://www.globalpost.com/dispatch/news/regions/europe/united-kingdom/130807/bank-of-england-carney-interest-rates-unemployment-forward-guidance