Mark Carney overhauls interest rate policy.......
Bank of England governor Mark Carney has overhauled the Bank's interest rate policy to reflect falling unemployment and the economic recovery.
He said the Bank's forward guidance policy "is working" and had helped to secure growth. The Bank's rate policy will now be determined not just by unemployment, but by a wider range of indicators. But Mr Carney warned the recovery was not secure and that when rates rose, they would do so only "gradually".
However, investors took this as an indication that rates could rise next year, sending the pound higher on the money markets. Introducing the Bank's forward guidance policy last August, Mr Carney said that the Bank would not consider raising interest rates from their current low of 0.5% until unemployment had fallen to 7% or below.
He said the policy had reduced uncertainty and encouraged businesses to hire and spend. "Forward guidance is working - expected interest rates have remained low even as the economy has recovered strongly, uncertainty about interest rates has fallen, and most importantly, UK businesses have understood the message," the governor said.
But he said the policy needed to be revisited "as a result of exceptionally strong jobs growth". The unemployment rate has fallen much faster than anticipated... and is likely to reach 7% by the spring," The bank’s inflation report said that the "Bank rate may need to remain at low levels for some time to come". Forward guidance has clearly been effective in influencing companies' expectations of when interest rates will rise and in cementing their confidence in the recovery," said Katja Hall, chief policy director of the CBI business group.
"The Bank's new guidance will give businesses further peace of mind that interest rates will stay low for some time, until investment and incomes are growing at sustainable rates