The Bank of England has promised to keep interest rates at record lows until the unemployment rate falls to 7 per cent, a radical change of monetary policy in the world’s sixth largest economy.
Mark Carney, the BoE’s new governor, unveiled the policy on Wednesday, alongside forecasts that show the central bank does not expect the unemployment rate to reach that level until at least mid-2016.
The policy, which is similar to the one adopted by the US Federal Reserve, is aimed at reassuring markets and the public that monetary policy will not tighten any time soon.
But the Bank of England said it would reconsider if inflation was set to be 2.5 per cent or higher in the medium-term, if inflation expectations were becoming out of control, or if the policy was threatening financial stability
“The message is that the MPC is going to maintain the exceptional monetary stimulus until unemployment reaches 7 per cent and then we will reconsider,” Mr Carney told his first press conference since he took on the top job last month. “We will do this while maintaining price and financial stability.”
There was a muted response from investors. The FTSE 100 fell 0.8 per cent, yields on 10-year government bonds climbed 3 basis points and sterling rose 0.5 per cent against the dollar.
Mr Carney said the economy was recovering, but remained far too weak. “This remains the slowest recovery in output on record,” he said. “We’re not at escape velocity right now.”
He stressed the 7 per cent unemployment rate was not a target, but a “way-station” on the path to full recovery.
By Sarah O’Connor, John Aglionby and Catherine Contiguglia. All times are London time