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| Bank of England Shifts on Factors That Could Prompt a Rate Increase | |
| (about 5 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 take a number of factors into account. | 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 number of factors into account. |
| 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 its growth forecast for 2014 again, to 3.4 percent from 2.8 percent which it had forecast in November. | |
| Overhauling his 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. | Overhauling his 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. |
| “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. | “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. |
| 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. | 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. |
| As in Britain, the economic outlook has improved in the United States, where 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 its guidance. | As in Britain, the economic outlook has improved in the United States, where 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 its guidance. |
| 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 now for greater clarity about their plans because the jobless rate has since fallen to 6.6 percent. | 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 now for greater clarity about their plans because the jobless rate has since fallen to 6.6 percent. |
| Overtaken by events, the British central bank has had little alternative but to review its August pledge to start considering raising interest rates, from a current record low of 0.5 percent, only when the unemployment rate falls to 7 percent. | Overtaken by events, the British central bank has had little alternative but to review its August pledge to start considering raising interest rates, from a current record low of 0.5 percent, only when the unemployment rate falls to 7 percent. |
| Years of record low interest rates and other government stimulus measures have helped revive the economy and push unemployment close to that 7 percent threshold years earlier than the central bank had anticipated. | Years of record low interest rates and other government stimulus measures have helped revive the economy and push unemployment close to that 7 percent threshold years earlier than the central bank had anticipated. |
| 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 unemployment, he said, while admitting that the central bank had learned from its experience. | 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 unemployment, he said, while admitting that the central bank had learned from its experience. |
| The speed with which the central bank has had to change strategy raises some awkward questions about its credibility 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. | The speed with which the central bank has had to change strategy raises some awkward questions about its credibility 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. |
| 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. | 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. |
| Robert Wood, an economist at Berenberg bank in London, welcomed Wednesday’s move, which he said was “an abrupt U-turn” and marked a return to “inflation targeting, with a few bells and whistles attached.” | Robert Wood, an economist at Berenberg bank in London, welcomed Wednesday’s move, which he said was “an abrupt U-turn” and marked a return to “inflation targeting, with a few bells and whistles attached.” |
| The bank said inflation had returned to its 2 percent target and suggested it would remain under control during the next three years. | The bank said inflation had returned to its 2 percent target and suggested it would remain under control during the next three years. |
| The pound jumped on Wednesday, suggesting that financial markets were factoring in a rate increase in 2015 despite Mr. Carney’s comments. Brian Hilliard, chief economist for Britain at Société Générale in London, said the Bank of England might see the positive side of a rise in the value of sterling, which would help reduce inflation. | The pound jumped on Wednesday, suggesting that financial markets were factoring in a rate increase in 2015 despite Mr. Carney’s comments. Brian Hilliard, chief economist for Britain at Société Générale in London, said the Bank of England might see the positive side of a rise in the value of sterling, which would help reduce inflation. |
| But he added that the bank would be disappointed that the markets had not believed that interest rates would stay low for some time. Mr. Carney’s updated forward guidance gave “no firm message,” Mr. Hilliard said. | But he added that the bank would be disappointed that the markets had not believed that interest rates would stay low for some time. Mr. Carney’s updated forward guidance gave “no firm message,” Mr. Hilliard said. |
| “His guidance today was no surprise but the strength of the growth forecast was,” Mr. Hilliard said, adding that this suggested that spare capacity in the economy might be absorbed relatively quickly, leading to higher interest rates. | “His guidance today was no surprise but the strength of the growth forecast was,” Mr. Hilliard said, adding that this suggested that spare capacity in the economy might be absorbed relatively quickly, leading to higher interest rates. |
| Mr. Carney’s comments about the unbalanced nature of the recovery highlight the difficult juggling act he faces. 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. | Mr. Carney’s comments about the unbalanced nature of the recovery highlight the difficult juggling act he faces. 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. |
| A rise in interest rates might choke off recovery and push up the value of the pound sterling, which has appreciated against the euro in recent months. | A rise in interest 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 did not expect unemployment to fall that low until 2016. Now it expects to have data by the spring showing that the rate reached 7 percent in January. | 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 did not expect unemployment to fall that low until 2016. Now it expects to have data by the spring showing that the rate reached 7 percent in January. |
| As the economic outlook improved, more economists started to expect the Bank of England to start raising rates earlier than 2016. | 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.” | |