The Week UK: Mark Carney to hold bank rate until jobless total falls to 7%
Tue 06 Aug 2013
MARK CARNEY'S 'forward guidance' policy is now in place. The Bank of England will not raise the bank rate from the current 0.5 per cent until Britain's unemployment rate has fallen to seven per cent. Because that is unlikely to happen until 2016, according to the Bank's own projections, the bank rate should stay at 0.5 per cent for at least another two-and-a-half years - bringing reassurance to mortgage holders. Nor will the Bank of England cut back on its 375bn asset purchase programme otherwise known as quantitative easing until the jobless rate is down to seven per cent.
Carney, in his first big set-piece address since taking over from Sir Mervyn King last month as Bank governor, said his strategy was designed to help secure Britain's economic recovery - a recovery he described as being underway" and apparently broadening". "While that is certainly welcome," he added, the legacy of the financial crisis means that the recovery remains weak by historical standards and there is still a significant margin of spare capacity in the economy. This is most clearly evident in the high rate of unemployment." A fall in Britain's jobless rate from 7.8 per cent to seven per cent would mean that 750,000 people were back in work.
First reaction to Carney's statement came from the currency and stock markets. The pound fell against other currencies because many had estimated an earlier date for a Bank rate rise and were now having to redo their sums. Shares rose immediately, but then quickly fell back, the BBC reports.
On the mortgage front, Jonathan Harris of Anderson Harris says Carney has offered "far more certainty than we have ever had". While it brings no comfort to savers, it will reassure overstretched borrowers who are worried about potential rate rises, he tells the Daily Telegraph. Peter Rollings, CEO of estate agent Marsh & Parsons, tells the Financial Times it will give the UK's housing market a "significant boost". He adds: "Growth in the country's GDP, reduction in unemployment and a feeling that we are finally out of the economic badlands means that the market can now be assured of certainty as far as interest rates are concerned."
But Marc Oswald, from Monument Securities, believes basing the interest rate on the unemployment rate looks like a "big mistake" as it is difficult to assess how many of the longer-term unemployed are actually employable?