Mark Carney set to tweak flagship interest rate policy

Bank of England governor forced to act after unemployment rate falls far quicker than expected

The governor of the Bank of England, Mark Carney, will overhaul his flagship forward guidance policy on interest rates today after just six months as Britain's unemployment rate eases sharply.

The central bank boss admitted in a speech to business leaders in Davos last month that the policy linking interest rates to unemployment needed to “evolve” - signalling that this would begin at its quarterly inflation report today.

Under the guidance, the Bank has said it will not even consider a hike in rates from their current low of 0.5 per cent until the rate of joblessness has fallen to 7 per cent, but this now looks likely to be achieved much more quickly than previously thought as the recovery speeds up.

When the policy was first announced in August, the Bank did not expect the unemployment threshold to be achieved until 2016.

Latest figures showed the jobless rate had already fallen within a whisker of the target - to 7.1 per cent - which has brought forward City expectations of an interest rate hike, with some predicting they will rise as early as this year.

Economists expect the Bank's guidance will now be tweaked to take into account a broader range of factors to reassure that rates are not set to rise any time soon.

The policy was launched to give households and businesses confidence that rates will stay low as the recovery takes hold.

While the Bank has stressed unemployment falling to 7 per cent will not automatically trigger a rate rise, the guidance has proved less reassuring as joblessness has plunged, prompting policymakers to reiterate the message that they are in no hurry to increase the cost of borrowing.

Last week, the latest monthly decision of the Bank's Monetary Policy Committee marked five continuous years that rates have remained at the record low of 0.5 per cent.

In his Davos speech last month, Mr Carney said the recovery had “some way to run” before any increase could be considered.

The introduction of guidance, marking a shift in Threadneedle Street's policy, was overseen by Mr Carney shortly after he began his tenure as governor last summer. Its latest modifications are likely to be seen in some quarters as a test of his credibility.

Experts have speculated that broadening out the terms of the policy could include taking into account factors such as real wages - which despite the recovery are still falling as weak pay growth lags behind inflation.

Jonathan Loynes of Capital Economics said while the changes could help tackle the problems associated with excessive dependence on one single indicator - unemployment - they could make it more difficult to give a “clear and straightforward message”.

However, he said a recent fall in inflation and slight slowing of economic growth in the fourth quarter of 2013 should make it relatively clear that interest rates “are going nowhere for some time yet”.

Inflation has now fallen to the Bank's target of 2 per cent for the first time for more than four years, easing the pressure to raise rates, while the latest growth figures showed UK output rising by 0.7 per cent in the fourth quarter against 0.8 per cent in the previous three months.

Howard Archer of IHS Global Insight said: “The Bank of England continues to place great emphasis on the fact that the recovery is coming from a low base and that significant headwinds could still derail it.

“It is evident that the Bank of England wants to give the economy every chance to develop sustained broad-based growth with business investment increasingly contributing.”

He said if forecasts in its quarterly report show inflation at the target rate of 2 per cent or lower over the next two years, it would be a “strong indication that it currently does not expect to be raising interest rates before late-2015 or even 2016”.

PA

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent