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Bank of England signals 'scope' to keep rates low under new guidance
Bank of England signals 'scope' to keep rates low under new guidance
(35 minutes later)
The Bank of England said interest rates will remain on hold until the economy recovers further under new guidance designed to reassure homeowners and businesses over the cost of borrowing.
Bank of England Governor Mark Carney was forced to overhaul his six-month-old forward guidance policy today as Threadneedle Street switched aim to take up more slack in the economy before raising interest rates.
In an additional forward guidance policy unveiled by the Bank, it stressed that there remains "scope" to keep rates at a record low of 0.5 per cent, adding that even when economic output returns to normal any future rises will be gradual and rates will be significantly below the 5 per cent average seen before the financial crisis.
The Bank has been surprised by how rapidly unemployment has fallen to within a whisker of the 7per cent threshold at which rate rises could be considered.
The Bank's quarterly inflation report signalled that markets expect rates to start to rise to 0.75 per cent at the start of the second quarter next year, with inflation remaining at around the 2 per cent target if borrowing costs rise as expected.
Carney — who insisted forward guidance “is working” amid hostile questioning — published the Bank’s estimate of the so-called “output gap” of slack in the economy for the first time, putting it at between 1 per cent and 1.5 per cent of GDP.
Bank governor Mark Carney insisted that forward guidance was working and said the next phase of the policy will reassure further over the path of rates.
The Bank’s “evolved” guidance insists that rate-setters will target soaking up all the “wasteful” spare capacity in the economy over the next three years. There is scope for more slack to be taken in before interest rates are raised, the Bank adds.
He said: "If and when the time comes that the economy can sustain higher interest rates, Bank rate is expected to rise only gradually. For a sustained and balanced recovery, the degree of stimulus will need to remain exceptional for some time."
Interest rates will only rise “gradually” and the Bank will monitor a range of indicators such as labour force participation and surveys of spare capacity in the economy. Rate rises will also be limited — potentially standing at 2 per cent only three years from now, Carney added.
Today's quarterly report gave further good news on the economy as the Bank revised up its forecast for output in 2014 to 3.4 per cent from its previous estimate of 2.8 per cent.
He stressed, however, that the recovery was “ neither balanced or sustainable” as yet and said: “The first phase of guidance gave businesses confidence that Bank Rate would not be raised at least until jobs, incomes and spending were growing at sustainable rates. As guidance evolves, that remains the case.”
The Bank said it expected growth figures for the fourth quarter of 2013 to be revised up from 0.7per cent to around 0.9 per cent. It added that the recovery will remain robust in the current quarter, forecasting growth of around 0.8 per cent.
The Bank noted that markets expect the first rate hike in April 2015, the month before the general election. Unlike last summer, the Bank did not go out of its way to say this expectation is “unwarranted”.
Mr Carney said: "The recovery has gained momentum. Output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began, and after four years above target the inflation rate is back at 2 per cent."
The original 7 per cent unemployment threshold, set last summer, should be met in the first three months of this year. The economic backdrop has strongly improved with the UK last year posting the strongest growth since 2007. Inflation has hit the monetary policy committee’s 2 per cent target for the first time in more than four years.
But the Bank said there was spare capacity in the economy of around 1 per cent to 1.5 per cent of GDP, which means there is no rush for rates to rise.
The Bank revised its growth forecast up dramatically to 3.4 per cent for this year and inflation is set to fall to 1.9 per cent at the end of this year.
The Bank's new pledge comes six months after it launched its first guidance policy assuring that rates would not rise until the rate of unemployment hits 7 per cent.
Faster than expected falls in joblessness has meant the rate has already fallen to within a whisker of the target - 7.1per cent - and the Bank said today it believes official figures will show the threshold was reached in January.
Its new guidance, designed to provide further clarity once the current threshold has been hit, has ditched linking rates to specific targets, instead using a number of broad-based terms.
Mr Carney said: "The first phase of guidance gave businesses confidence that Bank Rate would not be raised at least until jobs, incomes and spending were growing at sustainable rates.
"As guidance evolves, that remains the case: the MPC (Monetary Policy Committee) will not take risks with the recovery."
