WHILE claiming that ‘a renewed recovery is now under way in the United Kingdom’, Bank of England Governor Mark Carney said yesterday that interest rates will be kept at 0.5% for the foreseeable future.
He warned that ‘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.’
Giving his first monthly inflation report, he said: ‘This is most clearly evident in the high rate of unemployment.’
He announced that the Bank’s Monetary Policy Committee (MPC) ‘is today announcing explicit state-contingent forward guidance.
‘Our aim is to help secure the recovery, while ensuring that risks to price stability and financial stability are well contained.’
He added that ‘the MPC expects annual growth to be only 2.4% in two years’ time – a rate still a little below its historical average.
‘Moreover, the level of GDP is not expected to regain its pre-crisis peak until a year from now. This is the slowest recovery in output on record.
‘While job growth has been a relative positive in recent years, unemployment is still high.
‘There are one million more people unemployed today than before the financial crisis; and many who have jobs would like to work more than they currently can.
‘The weakness in activity has also been accompanied by exceptionally weak productivity.’
Carney said: ‘CPI inflation was 2.9% in June, and is likely to remain around that level in the near term, as it continues to be pushed up by past increases in import prices and an unusually large contribution from administered and regulated prices.
‘Even on the assumption that the Bank Rate remains at its current level and a sustained period of growth is delivered, inflation is expected to fall back to the 2% target only a little after the 2-year horizon.
‘For that reason, the MPC’s judgement is that the path of market interest rates implies a faster withdrawal of monetary stimulus than appears likely given the current economic outlook.
‘Above-target inflation, coupled with a depressed level of output, make for an exceptionally challenging environment in which to set monetary policy.’
On ‘forward guidance’, the new governor said: ‘The MPC intends, at a minimum, to maintain the currently exceptionally accommodative stance of monetary policy until economic slack has been substantially reduced, provided that this does not put at risk either price stability or financial stability.
‘In practice, that means the MPC intends not to raise the Bank Rate above its current level of 0.5% at least until the Labour Force Survey headline measure of unemployment has fallen to a threshold of 7%.
‘While the unemployment rate remains above 7%, the MPC stands ready to undertake further asset purchases if further stimulus is warranted.
‘But until the unemployment threshold is reached the MPC intends not to reduce the stock of asset purchases from the current £375 billion.
‘The Bank of England’s unwavering commitment to price stability and financial stability is such that this threshold guidance will cease to apply if material risks to either are judged to have arisen.
‘In that event, the unemployment threshold would be “knocked out”.’