Bank of England to link interest rates to job growth

The Bank of England governor Mark Carney stated today that the Bank will not raise interest rates until the high rate of unemployment in the UK has decreased from the current rate of 7.8% to 7%, or below, when the Bank would then re-examine interest rates.

According to Carney, who was appointed as BoE governor last month, about 750,000 jobs would need to be created to achieve this reduction in the unemployment figures, which could take three years. He said the unemployment threshold will hold unless inflation levels threaten to rise too quickly or if it poses a significant threat to financial stability. Also, the Bank would not cut back on its £375bn asset purchase programme, known as quantitative easing (QE), until the threshold was reached.

Analysts reportedly expect unemployment to fall slowly from its current level to an average 7.1 percent in the third quarter of 2016, the end of the forecast horizon.This indicates that the BoE expects to maintain interest rates at the same level until at least then, unless its conditions are broken. However economic data is said to show that the recovery in the UK economy is picking up pace and the jobless rate could fall significantly faster than expected. Recent official figures also revealed that there was an upsurge in manufacturing output during June this year and research has shown that the service sector and housing market is growing. Experts have forecast that UK inflation will fall to 2% in mid-2015.

The Governor commented that: “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. It is for these reasons that the MPC judges there to be a significant margin of slack in the economy, even though the extent of that slack, particularly the scope for a productivity rebound, is very uncertain.”