The Bank of England has officially launched US Federal Reserve-style forward policy guidance today, announcing it will keep interest rates low until unemployment has fallen to 7 per cent.
UK unemployment is currently at 7.8 per cent, the Bank said, and is not scheduled to to fall to 7 per cent until 2016, meaning interest rates are set to stay depressed for at least three years.
The Bank has also said that it would consider adding to its quantitative easing (QE) programme of asset purchases if “warranted”, and would not cut the programme until the 7 per cent barrier is reached.
Forward guidance enables central banks to indicate the future direction of policy, in a tool that should calm markets’ reaction to any rate change announcements.
The first guidance statement, made in the Bank’s Inflation Report press conference on Wednesday morning, was accompanied by news that the Bank has revised up its forecasts for UK growth from 1.2 per cent this year to 1.4 per cent.
Estimates for 2014 were up further, from 1.7 per cent to 2.5 per cent.
The decision to implement forward guidance has coincided with the appointment of Mark Carney as the new governor of the Bank of England, effective from the start of July.
“While the unemployment rate remains above 7 per cent the MPC stands ready to undertake further asset purchases if additional stimulus is warranted,” he said in a letter to the chancellor.
“But until the unemployment threshold is reached, and subject to maintaining price and financial stability, the MPC intends not to reduce the stock of asset purchases financed by the issuance of central bank reserves.”
The Bank also indicated that its 2 per cent inflation target would not be reached for most of the next two years.
