Mark Carney, Bank of England governor, has signalled his flagship policy of linking interest rates to unemployment will be buried less than six months after its birth, saying the British economy is “in a different place” from that of last summer.
Mr Carney flagged the policy U-turn in a series of TV interviews while attending the World Economic Forum in Davos. However, he added that he had no plans to raise interest rates “immediately”.
Speaking to BBC Newsnight in response to the news that unemployment had fallen to 7.1 per cent, almost to the point the BoE said it would consider a rate rise, the bank has decided not to revise its 7 per cent unemployment threshold, but drop the idea completely.
Asked whether the BoE would decrease the threshold to a lower figure, Mr Carney said: “Well there are a broad range of things we could do, I wouldn’t jump to that conclusion . . . we’re trying to get across that it’s all about overall conditions in the labour market.
“We wouldn’t want to detract from that focus by unnecessarily focusing on one indicator.”
The BoE followed the Federal Reserve in announcing forward guidance last August in a bid to make monetary policy "more effective". It said it would not consider a rate rise in the UK at least until unemployment fell to 7 per cent from the rate last summer of 7.9 per cent.
The BoE forecast that it was most likely that unemployment would fall to 7 per cent only in 2016. Recognising that a serious forecasting error has caused red faces at the BoE and created confusion over the policy, Mr Carney will address the subject again today and tomorrow.
Mr Carney made it clear that there was “no immediate need to increase interest rates” but said the economy was now “in a different place” to the time he introduced guidance.
Meanwhille British Prime Minister David Cameron will tell leaders in Davos today European countries, particularly the UK, can win back industrial jobs from cheaper Far Eastern competitors, .
Last year, one in 10 small- and medium-sized British businesses brought back some production from Asia, a trend dubbed as “reshoring” – double the number who transferred production the other way.
“From food processing to fashion, from cars to computer-makers. It’s not just one sector; it’s across all sectors of the economy,” Mr Cameron will say, adding that European leaders can make “a success of globalisation”.
“For years the West has been written off. People say that we are facing some sort of inevitable decline. They say we can’t make anything anymore,” Mr Cameron will say.
However, fashion brand, Jaeger, which stopped making clothes in Britain, has brought a tenth of its production back. Much-loved toy trainmaker, Hornby is doing the same, while computer firm, Raspberry Pi is making its products in Wales.
“Whether it’s the shift from manufacturing to services or the transfer from manual jobs to machines, the end point is the same dystopian vision – the East wins while the West loses; and the workers lose while the machines win.
“I don’t believe it has to be this way. Of course, we cannot be starry eyed about globalisation - it presents huge challenges as our economies and societies try to adapt. But neither should we take this pessimistic view.”
Manufacturing in Britain can be boosted by greater innovation, better customer services and government regulation, along with shorter supply lines and greater control over quality, said Mr Cameron.
– Copyright Financial Times
