Carney overhauls forward guidance
When he became governor in the summer of 2013 Carney issued so-called “forward guidance” on when bank base rate would rise from its historic low of 0.5%.
He said unemployment would have to fall to 7% before this happened, a scenario that was considered years away.
Official figures from January show it currently stands at 7.1% and may think that 7% has already been hit.
The Bank’s rate policy will now be determined not just by unemployment, but by a wider range of indicators.
In future, under a more complicated formula, the amount of spare capacity in the economy will be considered before an increase.
Carney warned the recovery was not secure and that when rates rose, they would do so only “gradually”.
He said: “Forward guidance is working – expected interest rates have remained low even as the economy has recovered strongly, uncertainty about interest rates has fallen, and most importantly, UK businesses have understood the message.”
But he added that the policy needed to be revisited “as a result of exceptionally strong jobs growth”, saying: “The unemployment rate has fallen much faster than anticipated… and is likely to reach 7% by the spring.”
The Bank’s inflation report said that the “Bank rate may need to remain at low levels for some time to come”.
Aldermore Residential Mortgages managing director Charles Haresnape said: “It is always dangerous to have one specific metric in place upon which to manage interest rate movements and, given the Bank of England does not have the best record of hitting its own metrics, it is therefore a wise move that the Governor has rethought this.
“This recovery from recession is different from others in that we are seeing poor levels of real wage growth and in some regions they are still falling. There is still fragility in the recovery, for example while improving levels of employment is good news, people still feel affordability is an issue. When the Funding for Lending Scheme and other government stimuli are curtailed, it is uncertain how this will affect confidence in the recovery.
“That said, house prices continue to rise in some parts of the UK, which is more a question of lack of supply interacting with some growth in demand and cheap mortgages. The Bank of England needs to keep an open mind and not be too focused on trying to predict the markets too far into the future.”