Friday, 15 November 2013

Half per cent interest rates for longer?

"It is perfectly possible that, as time moves on, the right thing to do will be to keep the Bank Rate at ½ per cent even when unemployment has dropped below our seven per cent threshold," said Martin Weale, a member of the Bank of England's rate setting committee, the MPC.

He was trying to explain the Bank's interest rate policy to A Level students this afternoon: no easy task!

It adds to the Bank governor, Mark Carney's statement this week that:

“One can imagine a scenario where the unemployment threshold is reached, and that the best policy choice for the Monetary Policy Committee in that period of time is to keep rates at current levels, because the trade-off between output and inflation is attractive because we can keep inflation on target and can grow the economy further.”

All this is in the context of Forward Guidance, the Bank's attempt to give us fair warning about when it might raise interest rates. The threshold for considering a rate hike, we had been told, was a fall in unemployment to 7% of the workforce.

Despite acknowledging that the economy is recovering much fast than the Bank of England expected, they clearly want to keep us anchored to the view that they might stick to rock bottom rates if they see fit.

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