Bank of England ties rates to jobs, markets unconvinced

Wed Aug 7, 2013 1:06pm EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By David Milliken and Olesya Dmitracova

LONDON (Reuters) - The Bank of England broke with tradition on Wednesday, planning to keep interest rates at a record low until unemployment falls to 7 percent or below, which it said could take three years.

Its attempt to steer expectations about future rate moves and bolster a fledgling economic recovery underwhelmed many investors, who brought forward expectations for when rates would rise from 0.5 percent - the opposite of what the central bank was hoping for - although the move faded later in the day.

Mark Carney, who took over as governor just over a month ago, said a recovery in Britain's economy was underway and appeared to be broadening but had a long way to go.

"We're not at escape velocity right now," he said at his first BoE news conference. "This remains the slowest recovery in output on record."

The Bank said it would consider raising rates if the public's medium-term inflation expectations rise dangerously high; if it forecasts that inflation in 18-24 months will be at 2.5 percent or higher; or if ultra-low rates pose a threat to financial stability, possibly a nod to Britain's housing market.

Some economists said those caveats raised questions about how long the forward guidance was good for and could make it harder for the Bank to reassure households and businesses that borrowing costs will not rise soon.

The U.S. Federal Reserve last year launched a similar plan to keep its interest rates near zero until unemployment falls to 6.5 percent or inflation expectations top 2.5 percent.

"The forward guidance contained in the inflation report was broadly expected but what was unexpected were the get-out clauses," said Lena Komileva at consultancy G+ Economics. "The BoE's pre-commitment to keeping rates at a record low is not as conclusive as it first appeared."   Continued...

Bank of England governor Mark Carney leads the bank's quarterly inflation report news conference at the Bank of England in London August 7, 2013. REUTERS/Simon Dawson/POOL