Economy

Moving Forward: Bank of England to change tack

LONDON (AP) — 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 percent before unemployment dropped to 7 percent.

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 percent 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 percent 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 percent target.

A number of options are available, including reducing the unemployment threshold to say 6.5 percent, 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.

Related Headlines

  • Bank of England seeks to assuage rate hike fears

    Bank of England Governor Mark Carney sought Wednesday to assure homebuyers and businesses that U.K. interest rates won't rise any time soon because the economic recovery is ... 

  • George Osborne

    Bank of England's Carney signals shift in policy

    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 ... 

  • Threat of housing bubble pushes Britain to act

    Can Britain avoid bubble trouble in its economy? Concerns are mounting that the country's housing market is overinflated, with London house prices rising almost 19 percent in ... 

  • Mark Carney

    Britain's economy returning to normal

    The Bank of England dampened expectations Wednesday that interest rates in the U.K. will be raised imminently as Governor Mark Carney said the country's economy has only begun ...