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Bank of England Moves Away From Unemployment Trigger Bank of England Moves Away From Unemployment Trigger
(about 2 hours later)
LONDON — The Bank of England on Wednesday abandoned its six-month-old strategy of pledging to consider raising interest rates only when unemployment falls to 7 percent, saying it would now consider a range of factors. LONDON — The Bank of England on Wednesday abandoned its six-month-old strategy of pledging to consider raising interest rates only when unemployment falls to 7 percent, saying it would now take a range of factors into account.
Mark J. Carney, the governor of the Bank of England, also stressed that a rate increase was still some way off. Mark J. Carney, the governor of the Bank of England, also stressed that higher interest rates were still some way off and that any increase would be gradual. The central bank also raised growth forecasts for 2014 again, predicting 3.4 percent economic growth rather than the 2.9 percent expected in November.
Overhauling his so-called “forward guidance” strategy, Mr. Carney said that decisions on an increase would now be linked to a broader range of factors, including spare capacity in the economy, labor productivity and wage growth. Overhauling his so-called “forward guidance” strategy, Mr. Carney said that decisions on a rate increase would now be linked to a broader range of factors, including spare capacity in the economy, labor productivity and wage growth.
“The recovery as yet is neither balanced nor sustainable,” Mr. Carney told a news conference, adding that the bank’s new policy would take no risks with that fragile recovery. “As yet the recovery is neither balanced nor sustainable,” Mr. Carney told a news conference, adding that the central bank would take no risks with the fragile economic rebound.
This would be achieved by “waiting to raise the bank rate until spare capacity has been absorbed and then eventually through gradual and limited rate increases. Bank rates may need to stay at low levels for some time to come,” Mr. Carney said. Securing the recovery could be achieved by “waiting to raise the bank rate until spare capacity has been absorbed further and then eventually through gradual and limited rate increases. Bank rates may need to stay at low levels for some time to come,” Mr. Carney said.
The central bank was forced to review its August pledge to only start considering raising interest rates from a current record low of 0.5 percent when the unemployment rate would fall to 7 percent. But years of record low interest rates and other government stimulus helped to revive the economy and push unemployment close to the 7 percent threshold years earlier than the central bank anticipated. As in Britain, the economic outlook in the United States has improved, and the Federal Reserve has cut back on the bond-buying part of its stimulus effort. When it comes to interest rates, and linking them to the unemployment rate, the Fed has also made adjustments in strengthening its guidance.
“We didn’t expect to be here at this point in time but we have learned,” Mr. Carney said. In 2012, the Fed said that it planned to keep short-term interest rates near zero at least as long as the unemployment rate remained above 6.5 percent. The Fed revised that in December, saying it was likely to maintain that policy well past that threshold. Some Fed officials have said there is a need for greater clarity about its plans since the jobless rate has fallen to 6.6 percent.
The change of strategy raises some questions about the credibility of the Bank of England and whether its so-called forward guidance policy worked. The policy was introduced to much fanfare by Mr. Carney when he took over as Bank of England governor and Britain’s economy was in much need of support. Overtaken by events, the British central bank has had little alternative but to review its August pledge to only start considering raising interest rates from a current record low of 0.5 percent when the unemployment rate falls to 7 percent.
But some economists have said the policy lacked credibility from the start because the unemployment rate threshold was too high, leaving investors and consumers wondering about how soon interest rates would rise again. Years of record low interest rates and other government stimulus measures helped revive the economy and push unemployment close to the 7 percent threshold years earlier than the central bank had anticipated.
“Forward Guidance was meant as an aid to recovery,” Robert Wood, an economist at Berenberg Bank in London, said before the announcement. “The fact that the economy has done really well since then doesn’t mean it has failed but it hasn’t achieved much either.” However, Mr. Carney argued that his policy “is working” and had instilled business confidence by giving more certainty, helping growth prospects. Even critics of forward guidance had not predicted such a sharp fall in joblessness, he said, while admitting that the central bank had learned from its experience.
Mr. Wood added that the Bank of England had no choice but to change its strategy because any more stimulus “would look dangerous.” The speed with which the central bank has had to change strategy raises some awkward questions about the credibility of the Bank of England nonetheless. The policy was introduced with much fanfare by Mr. Carney as he took over as Bank of England governor in the summer, when the unemployment rate was 7.8 percent and Britain’s economy was in much need of support.
In a sign that the economic recovery in Britain is gaining momentum, the unemployment rate fell to 7.1 percent in the three months through November from 7.8 percent in the summer, when the Bank of England announced its forward guidance strategy. At the time, the Bank of England expected unemployment to fall that low only in 2016. Some economists have said the policy lacked credibility from the start because the unemployment rate threshold was too high, leaving investors and consumers wondering about how soon interest rates would rise again.
As the economic outlook improved, more economists started to expect the Bank of England to start raising rates earlier than 2016. Until now, Mr. Carney has been rejecting such suggestions, saying that the recent improvement might be more fragile than it looks. Under mounting pressure about his policy, Mr. Carney was forced to repeatedly reiterate that the Bank of England was not considering an interest-rate increase anytime soon. The old forward guidance framework “is now dead,” Michael Saunders said in a note for Citi Research.
Mr. Carney said that decisions on an increase would now be linked to a broader range of factors, including spare capacity in the economy, labor productivity and wage growth. Robert Wood, an economist at Berenberg Bank in London, welcomed the move, which he said was “an abrupt U-turn” and marked a return to “inflation targeting, with a few bells and whistles attached.” One of the bank’s main objectives is delivering price stability as defined by the government’s inflation target of 2 percent.
As in Britain, the economic outlook in the United States has improved, and the Federal Reserve has had to adjust its guidance. The bank, Mr. Wood said, “is planning to adjust interest rates as slack in the economy is eroded in order to deliver inflation around the target. That is inflation targeting.”
The Fed said in 2012 that it planned to keep short-term interest rates near zero at least as long as the unemployment rate remained above 6.5 percent. It has since said that it is likely to maintain that policy well past that threshold. But with the unemployment rate at 6.6 percent in January, some Fed officials have said there is a need for greater clarity about its plans. The bank said inflation had returned to the 2 percent target and suggested it would remain under control during the next three years.
However, Mr. Carney’s comments about the unbalanced nature of the recovery highlight the difficult juggling act he needs to pull off. While growth in Britain is impressive by European standards, much of it appears driven by consumer demand. Productivity growth has been disappointing and there is a risk of a property bubble developing in the southeast of England.
Yet a rise in rates might choke off recovery and push up the value of the pound sterling, which has appreciated against the euro in recent months.
In a sign that the economic recovery in Britain is gaining momentum, the unemployment rate fell to 7.1 percent in the three months through November from 7.8 percent in the summer, when the Bank of England announced its forward guidance strategy. At the time, the bank expected unemployment to fall that low only in 2016. Now it expects the rate to reach 7 percent by the spring.
As the economic outlook improved, more economists started to expect the Bank of England to start raising rates earlier than 2016.
Britain’s main business lobby group, the Confederation of British Industry, welcomed Mr. Carney’s policy shift.
“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,” said Katja Hall, the body’s chief policy director. “The Bank has made clear that even when the economy is operating at more normal levels, rates will only increase gradually.”