By Marcus Leach
Mark Carney, the Bank of England governor, has announced plans that will see the Bank hold interest rates at 0.5% until the jobless rate has fallen to 7% or below.
Mr Carney said he expected this would require the creation of about 750,000 jobs and could take three years. At present the rate of unemployment in the UK stands at 7.8%.
The governor said this extra clarity was needed to avoid unnecessary fears that interest rates would rise after recent positive economic news.
"The MPC stands ready to undertake further asset purchases while the unemployment rate remains above 7% if it judges that additional monetary stimulus is warranted," said a statement on the Bank's website.
"But until the unemployment threshold is reached, and subject to the conditions below, the MPC intends not to reduce the stock of asset purchases financed by the issuance of central bank reserves and, consistent with that, intends to reinvest the cash flows associated with all maturing gilts held in the Asset Purchase Facility.
"The guidance linking Bank Rate and asset sales to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached:
· in the MPC’s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target;
· medium-term inflation expectations no longer remain sufficiently well anchored;
· the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability that cannot be contained by the substantial range of mitigating policy actions available to the FPC, the Financial Conduct Authority and the Prudential Regulation Authority in a way consistent with their objectives."
However, Graeme Leach, Chief Economist at the Institute of Directors, said that the announcement doesn't really take us forward.
“Forward guidance doesn't really take us forward, and we are very concerned at the use of monetary policy to chase unemployment," he said.
“We're still looking at an economy which will struggle to reach trend growth, let alone exceed it.
“We're looking at a moderate growth spurt over the next 12 months but the new normal could be GDP growth of below two per cent thereafter.
“To get growth above two per cent on a sustained basis we need a productivity surge. And to get a productivity surge we need radical supply side reforms which are unlikely in the run up to a general election.”
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