Governor of the Bank of England Mark Carney has just announced changes to his forward guidance policy on interest rates, confirming expectations that it won't just be unemployment levels that will fuel a rise.
In the Bank's inflation report, Carney said that the forward guidance policy was working. It's reduced uncertainty over interest rates, he said, which has led to increased confidence in the UK's economic prospects and has encouraged businesses to expand, with the economy recovering strongly.
However, he's warned that this recovery is not yet balanced or stable, with the policy needing to be revised on the back of "exceptionally strong jobs growth". Unemployment levels have fallen unexpectedly fast – it's estimated that the 7% target could be reached as soon as the spring – so in order to ensure a balanced recovery a number of other economic indicators will need to be used.
These include a sustained 2% inflation target, wage growth and increased productivity, and although employment rates will still come into it the focus will be on average hours worked, involuntary part-time working and spare capacity in companies, rather than a basic unemployment target.
The report provides yet more certainty over interest rates – "bank rate may need to stay at low levels for some time", the report stated, with an indication that a rate of 2% could potentially be reached by 2017. However, it confirmed that any increase would be gradual and only "when the time comes that the economy can sustain higher interest rates", so consumers won't need to worry about imminent rises for the foreseeable future.
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