7 Aug 2013

Mark Carney’s move: interest rates to stay at historic low

In his first major move since taking the helm at the Bank of England, new governor Mark Carney announces that interest rates will not be increased until unemployment drops below seven per cent.

Mr Carney said interest rates would stay at 0.5 per cent, where they have been since March 2009, until the unemployment level dropped.

This means it is unlikely that interest rates will increase before the end of 2016.

The governor said that even though a “renewed recovery was now underway” in the UK, the legacy of the financial crisis meant that recovery was the slowest on record. He added that this was most clearly seen in the high levels of UK unemployment.

By holding interest rates at 0.5 per cent, Mr Carney is aiming to create certainty for businesses and individuals, increasing confidence and encouraging them to spend, which would in turn boost the economy.

It is now more important than ever for the monetary policy committee to be clear and transparent. Mark Carney

The move is an echo of a similar strategy from his time as the chief of the Bank of Canada, when he slashed interest rates after one month in the job in a move which has been widely praised for protecting Canada from the worst effects of the financial crisis.

Weak recovery

Mr Carney said: “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.

“It is now more important than ever for the monetary policy committee to be clear and transparent about how it will set monetary policy in order to avoid an unwarranted tightening in interest rate expectations as the recovery gathers strength.

“That’s why today the MPC is announcing explicit state contingent forward guidance, our aim is to help secure the recovery while ensuring that risk to price stability and financial stability are well contained.”

High unemployment

There are one million more people unemployed today than before the financial crisis, Mr Carney said. The unemployment rate is at around 7.8 per cent.

However, Mr Carney said, if unemployment does fall below 7 per cent, something not anticipated to take place for three years, that would not automatically trigger an increase in interest rates.

He also said that the UK’s unemployment target should be much lower than 7 per cent, but that it was at this level that the MPC would reconsider its interest rates position.

Mr Carney added that the Bank of England would consider raising interest rates before the unemployment rate had fallen to the required level, if their low level was threatening to economic security.

The Bank of England said it expected growth will reach an annual rate of 2.6 percent in two years’ time, compared with a forecast of 2.2 percent three months ago.

Mr Carney, hired by Chancellor George Osborne in November last year, has previously stressed the importance of reassuring the public and businesses reassuring that their debt costs are not going to rise any time soon. This, he has said, will increase confidence about spending which would help the economy.