Bank of England Moves Away From Unemployment Trigger


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.

Mark J. Carney, the governor of the Bank of England, also stressed that a rate increase was still some way off.

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.

“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.

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.

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.

“We didn’t expect to be here at this point in time but we have learned,” Mr. Carney said.

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.

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.

“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.”

Mr. Wood added that the Bank of England had no choice but to change its strategy because any more stimulus “would look dangerous.”

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.

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.

Read more at http://www.nytimes.com/2014/02/13/business/international/bank-of-england-moves-away-from-unemployment-trigger.html?_r=0


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