Bank of England to target unemployment & inflation in major policy shift

Commuters cycle past the Bank of England (centre) in the City of London on Wednesday, Aug 7, 2013. The Bank of England announced a major policy shift on Wednesday, saying explicitly that it was now targeting unemployment as well as inflation. -- PHOT
Commuters cycle past the Bank of England (centre) in the City of London on Wednesday, Aug 7, 2013. The Bank of England announced a major policy shift on Wednesday, saying explicitly that it was now targeting unemployment as well as inflation. -- PHOTO:  REUTERS

LONDON (AFP) - The Bank of England announced a major policy shift on Wednesday, saying explicitly that it was now targeting unemployment as well as inflation.

The new head of the bank Mark Carney provided clear guidance on when it can be expected to raise Britain's record-low interest rate.

The Canadian national, speaking at his first policy press conference since becoming BoE governor last month, also noted that "a renewed recovery is now under way" for Britain's economy.

In a statement, the BoE said that it "intends not to raise Bank Rate from its current level of 0.5 per cent at least until ... the unemployment rate has fallen to a threshold of seven per cent" - as it provided markets with so-called forward-guidance as used by the US Federal Reserve.

The Bank of England's own projections indicate that such a drop from the current unemployment rate of 7.8 per cent would not occur for three years.

But interest rates could rise earlier should British inflation remain high, it added.

British governments have for many years tasked the BoE with using its key interest rate to try and keep the country's annual inflation close to 2.0 per cent.

But Mr Carney on Wednesday focused on the unemployment picture.

"Unemployment is still high. There are one million more people unemployed today than before this (2008) financial crisis," said the former head of Canada's central bank.

The BoE added that its Monetary Policy Committee (MPC) stood ready to provide the economy with more cash stimulus while the unemployment rate remains above seven per cent - and despite a recent recovery of British growth.

The Bank of England described its pledge over interest rates and stimulus as "explicit guidance regarding the future conduct of monetary policy".

Finance minister George Osborne welcomed the shift by the independent BoE.

"Given the exceptional economic challenges continuing to face the UK economy, I agree ... that forward guidance can play a useful role in enhancing the effectiveness of monetary policy and thereby supporting the recovery," the chancellor of the exchequer said in a published letter to Mr Carney.

Markets had widely expected some form of guidance being introduced by Mr Carney, resulting in little change to sterling and London's benchmark FTSE 100 index of shares following the confirmation.

The Bank of England's main interest rate, which has stood at 0.50 per cent since March 2009, is closely tied to borrowing costs offered by the retail banking sector.

The BoE's record-low rate has resulted in cheap loans for home owners but poor returns for people with deposited savings.

"By tying policy to unemployment, which is a clearly measured and very visible economic variable, the Bank is making a communication statement allowing the average man in the street or business owner a much more visible and transparent measure of the Bank's thinking," said Mr Alistair Cotton, senior analyst at Currencies Direct trading group.

Britain's economy enjoyed an upturn in fortune during the second quarter of this year, with gross domestic product growth of 0.6 per cent, double the rate of the first quarter.

In a bid to aid Britain's recovery from recession amid deep cuts to government spending, Mr Carney's predecessor Mervyn King and the MPC's other policymakers agreed to pump Britain's economy with £375 billion (S$731.5 billion) of new cash under so-called quantitative easing.

Under QE, which also began in March 2009, new cash has been created by the BoE to purchase assets such as government and corporate bonds with the aim of boosting lending and in turn economic activity.

QE can stoke inflation, however, as it is tantamount to printing money.

Britain's current annual inflation rate is expected in the coming months to fall from a 14-month peak of 2.9 per cent, the BoE said on Wednesday.