LONDON – The Bank of England is set to unveil a new policy framework after unemployment in Europe’s third-largest economy has fallen far faster than anticipated.
Its Canadian governor, Mark Carney, is expected to use the opportunity of the bank’s quarterly projections on Wednesday to update the guidance on the future path of monetary policy.
The overall message, though, is expected to remain the same: Interest rates won’t rise any time soon.
Carney introduced “forward guidance” when he took the top job last summer, saying the bank wouldn’t raise its key interest rate from the current record low of 0.5 per cent before unemployment dropped to 7 per cent.
At the time, that threshold wasn’t expected to be breached until next year so homebuyers and businesses would have the confidence to borrow and spend.
However, unemployment has dropped far faster than the bank anticipated and now stands at 7.1 per cent as the British economy has shown renewed signs of life.
Unsurprisingly, given the guidance offered, many in the markets concluded that interest rates would rise way sooner than expected. Carney, in response, said the threshold was just a staging post for a policy assessment, setting the scene for an update at Wednesday’s publication of the Inflation Report.
While some economists have speculated the bank may ditch forward guidance, Carney has stressed that the recovery is still weak. He notes that Britain’s economy is 1.3 per cent smaller than before the Great Recession, that the government’s spending cuts to deal with the country’s high debts will remain in place for years to come and that inflation remains around the 2 per cent target.
A number of options are available, including reducing the unemployment threshold to say 6.5 per cent, in line with the U.S. Federal Reserve’s mandate. But many economists think the Bank may opt for something different.
“It seems more likely that the bank will instead shift the focus to a broader range of indicators, including wage growth, as determinants of future interest rates,” said Chris Williamson, chief economist at Markit.