DAVOS, Switzerland – Bank of England Governor Mark Carney said Friday that super-low U.K interest rates would remain in place for a while yet as he effectively scrapped the monetary policy framework he introduced just months ago following a bigger than expected drop in unemployment.
In August, the central bank said it would not consider raising interest rates from their record lows until unemployment fell to 7 per cent. But doubts have grown over this “forward guidance” in recent months as unemployment has fallen rapidly, hitting 7.1 per cent at last count.
In a speech to business leaders in the Swiss ski resort of Davos, Carney said the rate of unemployment consistent with stable inflation in the medium term “is somewhat lower” than the bank had assessed in August.
“The recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy,” Carney said.
He said evidence that inflation is likely to remain subdued because of weak global growth and lower commodity prices also reinforced the need to maintain the current loose policy. In December, consumer price inflation fell to 2 per cent, the first time in years it met the Bank of England’s official target.
Carney also sought to reassure businesses and homeowners that when the time eventually comes to move away from the current “emergency settings of policy,” any moves would be gradual. To get the U.K. economy out of its deepest recession since World War II, the bank has kept its main interest rate at the record low of 0.5 per cent for nearly five years.
“The degree of stimulus will remain exceptional for some time,” he said. “That should help reassure British business that the path of interest rates will be consistent with a sustained recovery — that is, with escape velocity.”
Carney said the bank’s assessment of how to update its forward guidance will begin with the February Inflation Report, its quarterly economic update. A range of options will be considered, he said.
George Osborne, Britain’s economics minister, denied that Carney’s remarks represented a failure in the use of forward guidance.
Osborne told a panel at the World Economic Forum that the governor’s plan to change the guidance was evidence the policy “works.”
And without a clear communications strategy, Osborne suggested, unemployment would not have fallen as much.
“I cannot see this as a failure of monetary policy in the U.K.,” Osborne said.
In the financial markets, some analysts were surprised by Carney’s comments on the forward guidance.
“It seems premature to consign it to the scrap heap just yet, given the threshold was always a ‘staging post’ and not a trigger,” said Michael Hewson, senior market analyst at CMC Markets.
The pound fell after the comments. Against the dollar, it was down 0.8 per cent at $1.6499. The pound has been one of the world’s best performing currencies in recent months as traders priced in the possibility that the central bank might raise its main interest rate from the record low of 0.5 per cent sooner than expected following a run of solid economic data.