Bank of England Governor Mark Carney underscored his pledge to keep interest rates at a record low in a recasting of forward guidance to combat persisting slack in the British economy.
“The first phase of guidance gave businesses confidence that bank rate would not be raised at least until jobs, incomes and spending were growing at sustainable rates,” Carney said in London as he published the central bank’s quarterly Inflation Report.
“As guidance evolves, that remains the case: the Monetary Policy Committee will not take risks with the recovery.”
The BOE raised its growth forecasts today, prompting investors to increase bets for higher rates even as Carney tries to reassure Britons that borrowing costs will stay at 0.5 per cent for some time. Other central banks including the Federal Reserve are also refining their forward guidance as they try to secure sustainable recoveries for their economies.
The BOE now reckons that unemployment fell to the 7 per cent threshold for its original guidance in the quarter through January. In the Inflation Report, BOE officials also estimated an output gap at 1 per cent to 1.5 per cent of gross domestic product as they provided more detail on the factors that will influence their decisions. The MPC “is for the first time today providing guidance that it is seeking to absorb all the spare capacity in the economy over the next two to three years,” Carney said. “That recognises that spare capacity is both wasteful and increases the risk that inflation will undershoot the target” of 2 per cent. Carney set the 7 per cent jobless level to consider an interest-rate increase when he introduced guidance in August. While unemployment has fallen faster than officials expected, prompting questions about the policy’s credibility, the BOE is maintaining its push to convince households and businesses that higher interest rates are still some way off.
In its report, the BOE said it expects fourth-quarter GDP growth will be revised up to 0.9 per cent from the 0.7 per cent estimated by the statistics office. It forecast a similar pace of expansion this quarter. For the full-year 2014, it raised its projection to 3.4 per cent from 2.8 per cent in November. The pound strengthened after the bank released its forecasts. It was up 0.4 per cent at $1.6517 as of 12:44 p.m. in London.
While the BOE offered an upbeat outlook, saying it expects the recovery to become “more entrenched and more broadly based,” it added that any rate increases are likely to be gradual. “We are serene about where the stance of monetary policy should be,” Carney said. “Serene but not complacent.”
Bloomberg
