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Bank Of England Ties Future Rate Rises To Drop In Unemployment

posted 7 Aug 2013, 06:36 by Mpelembe   [ updated 7 Aug 2013, 06:37 ]

The Bank of England plans to keep interest rates at a record low until unemployment falls to 7 percent - something unlikely for another three years - in a major new departure for British monetary policy.

 LONDON, ENGLAND, UNITED KINGDOM  (REUTERS) -  The Bank of England said on Wednesday (August 7) that it would keep interest rates at 0.5 percent unless inflation threatened to get out of control or there was a danger to financial stability.

Canadian Mark Carney who took over from the long-serving Mervyn King as BoE governor said bank rates will not be raised until unemployment fell.

BoE policymakers said they stood ready to buy more government bonds if additional stimulus was needed and would not reverse existing purchases while unemployment was too high.

"While the unemployment rate remains above seven percent, the MPC (Monetary Policy Committee) stands ready to undertake further asset purchases is further stimulus is warranted. But until the threshold level is reached, the MPC intends not to reduce the stock of asset purchases from the current 375 billion pounds," Carney told a news conference.

Carney said the BoE will not keep interest rates low for a set period of time.

"Now it's important to stress that forward guidance does not mean the MPC is promising to keep interest rates low for a particular period of time. The path of bank rates and asset purchases will as always depend on economic conditions," Carney said.

The BoE said that growth was likely to be "weak by historical standards", even though economic recovery was "taking hold" and inflation was forecast to stay above its 2 percent target until the second half of 2015 based on market rate expectations.

A growing number of major central banks are providing so-called forward guidance to help nurse their economies back to health after the damage of the financial crisis.

For the BoE, the challenge is to hold off a premature rise in British borrowing costs at a time when signs of economic recovery at home and the U.S. Federal Reserve's decision to phase out stimulus are already starting to push up market interest rates.

Markets already did not expect the BoE to start to raise interest rates until late 2015 at the earliest.

The BoE said Britain's economy had strengthened over the past three months. But output still remains more than 3 percent below its pre-crisis peak, a much weaker recovery than in the United States or Germany.

The BoE now forecasts that the economy will grow 0.6 percent during the current quarter - the same as between April and June, and that growth will reach an annual rate of 2.6 percent in two years' time, compared with 2.2 percent forecast three months ago, assuming interest rates stay on hold.

Unemployment is forecast to fall only slowly from its current level of 7.8 percent of the workforce, with the central bank expecting it to average 7.1 percent in the third quarter of 2016, the end of its forecast horizon.

This implies that the BoE expects to keep interest rates unchanged until at least that time, unless one of three conditions is breached before then.

The BoE will consider raising interest rates if their low level poses a threat to financial stability, if the public's medium-term inflation expectations rise dangerously high or if it forecasts that inflation in 18-24 months will be at 2.5 percent or higher.

Inflation is forecast to average 2.9 percent in the last three months of this year - close to its current level and a lower peak than previously thought - and then to fall roughly as predicted three months ago.