Mark Carney switches forward guidance rules as growth forecasts hit 3.4 per cent

Bank drops unemployment goal for vaguer 'output gap' interest rate rise trigger

Mark Carney has been forced to overhaul his flagship forward guidance policy on interest rates, just six months after its high-profile launch.

The Bank of England's Governor said last summer that the Bank would not lift interest rates from their present record lows until the unemployment rate dropped below 7 per cent, something it did not foresee happening until 2016.

But the jobless rate has fallen much quicker, as the economic recovery has gathered pace, and the Bank forecast yesterday that the 7 per cent threshold would be breached in the first quarter of this year.

In response, Mr Carney unveiled what he called a "new phase" of guidance, saying the Bank could afford to keep rates on hold because there was still slack in the economy that needed to be used up. "There remains scope to absorb spare capacity further before raising the Bank rate," Mr Carney said, adding that the Bank's rate-setting Monetary Policy Committee judged that the economy's so-called "output gap" was currently around 1 to 1.5 per cent of GDP.

He denied that his flagship policy had been a failure. "Forward guidance is working," he said. "Expected interest rates have remained low even as the economy has recovered strongly and, most importantly, UK businesses have understood the [low rates] message."

The output gap is the degree to which the economy is operating below its theoretical potential. The Bank has never published its estimate of this metric before and it is impossible to confirm in real time. The Bank said it would continuously estimate the degree of slack by looking at "under-employment" levels and businesses' reports of their own spare capacity. It added that rates would need to rise before the output gap was fully closed.

City traders estimate that the first rise will probably come in the second quarter of 2015, close to the next general election. Mr Carney refused to give credence to that view, but analysts noted that the Bank did not call market rate expectations "unwarranted", as it did last summer.

Mr Carney added that when rates finally did begin to go up, they would do so only "gradually". The market consensus shows rates rising gradually to 2 per cent by 2017. The Bank added yesterday that even when the output gap had fully closed the appropriate level of interest rates would likely be "materially below" the average 5 per cent seen before the financial crisis.

The Bank upgraded its growth forecasts, projecting a 3.4 per cent GDP expansion this year, up from its 2.8 per cent forecast in November. It expects 2.7 per cent growth in 2015, also up on the 2.3 per cent it forecast three months ago.

However, Mr Carney warned that the recovery so far was "neither balanced or sustainable" and stressed that business investment needed to take over from household spending as a driver of growth this year.

The Bank also lowered its inflation forecast to below the official 2 per cent target at the end of this year, falling to 1.86 per cent in the final quarter of 2014.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power