John Aglionby Closed Live blog: Mark Carney press conference

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

Good morning. As FT economics editor Chris Giles wrote last week, new Bank of England Governor Mark Carney has had (by ‘Old Lady of Threadneedle Street’ standards) an action-packed first month. But his first major test comes at 10.30am today with the quarterly inflation report, assessment of the UK economy and expected unveiling of ‘forward guidance’.

What form, if any, will his forward guidance take? How long will interest rates, which have been at 0.5% since March 2009, stay at such a low level? FT economics reporter Claire Jones, who is at the press conference, has compiled this comprehensive guide as to what we can expect and how we will know if Carney has “passed” his test.

A big unknown is to what extent will Carney and the Monetary Policy Committee take into account the recent burst of strong UK economic data, from factory output rising 1.9 per cent between May and June ] and activity in the dominant services sector expanding at its fastest pace for more than six and a half years.

Markets are, so far, fairly subdued this morning ahead of the Carney show. Sterling weakened against 13 of its 16 major counterparts in early trading, dropping 0.3 per cent against the dollar to $1.53 and 0.1 per cent against the euro to 86.78 pence per euro.

Former MPC member Andrew Sentance has written in his blog that there’s a danger we might be getting our hopes too high.

Any “forward guidance” offered by the Bank of England this week is unlikely to change the outlook for the UK economy significantly. The economy is already on a recovery track, but growth is still likely to be slow by historical comparisons. The 2% GDP growth that PwC is forecasting for next year would be strong by the standards of the current recovery. But it is still less than any year of growth we saw from 1993 until 2007.

That is telling us something about the current growth environment and it is not unique to the UK. All the major western economies are facing a more difficult climate than before 2007. The tailwinds which supported economic growth before the financial crisis have been replaced by a set of headwinds which are contributing to a “new normal” of low growth for western economies. Access to finance is more restricted. High and volatile energy, food and commodity prices are squeezing living standards. And central banks and governments no longer have the room for manoeuvre to support growth – with interest rates already on the floor and large deficits and rising debts in most western economies.

This is a very difficult environment for central banks wishing to design “forward guidance” and we should not build up our hopes about its accuracy or effectiveness. After Mark Carney promised to keep Canadian interest rates at 0.25% for a year in 2009, he raised them very quickly to 1% in 2010. So when the world changes, monetary policy must also adjust. We may also find that in the UK, whatever the Bank says next week.

If you want to watch the press conference live, here’s the BoE link:

Another first for the Bank of England today is that after the press conference it is due to host a technical briefing for outside eonomists to provide more detail on how the guidance should be interpreted.

Simon Hayes of Barclays writes:

This is the first time the Bank has hosted such a meeting, and highlights the importance it attaches to ensuring the policy is properly communicated and understood, particularly in financial markets.

If you want to watch the press conference live, here’s the BoE link:

Amit Kara, an economist at UBS, is warning his clients not to expect too much today. The former BoE official says the new forward guidance policy will have to satisfy both Carney and some of the more sceptical members of the MPC. It will also need to be strong enough to manage market expectations, but flexible enough to give MPC wiggle-room.

We may be underestimating the skills of BoE economists, but in our view the market should brace itself for disappointment either because the framework is unable to cope with these conflicts, thereby delivering a very weak form of forward guidance, or the BoE proceeds regardless with a form of precommitment that is so strong that the bank will have to make a U-turn sooner or later when reality deviates from its forecasts.

The consensus is growing that Mark Carney is more human than magician. Philippe Legrain, author of Immigrants: Your Country Needs Them & Aftershock: Reshaping the World Economy After the Crisis, tweets:

Anyone wanting to learn more about Mark Carney and whether he can justify Chancellor George Osborne’s hype, should read FT Economics Editor Chris Giles’s profile of him in the FT Magazine.

The FT’s Claire Jones and John Authers are reading the new guidance policy in a locked-down room in the Bank of England. We’ll hear from them at 10.30 when they are let out.

FT Markets reporter Neil Dennis writes that ahead of Mark Carney’s statement, UK assets are a little subdued:
Sterling is down 0.4 per cent to $1.5291 against the dollar.
The euro is up 0.1 per cent to £0.8674.
The yield on the benchmark 10-year Gilt is down 3 basis points at 2.45 per cent.
The FTSE 100 is down 10 points at 6594

Mark Carney says a renewed recovery is now under way in the UK, but remains weak by historical standards. Preamble to “state contingent” forward guidance.

The MPC expects economic growth to be 2.4 per cent in two years time

Carney: It is the slowest recovery on record

Here is the inflation report document

The FTSE 100 index has soared since Carney started speaking

And the document describing guidance

Carney: GDP will not hit pre-crisis peak until a year from now

The BoE will not raise interest rates until unemployment falls to 7%

This threshold guidance will cease to apply if material risks emerge

The MPC’s choice of the unemployment rate as the “threshold”, which mirrors the Fed, was widely expected by economists

Interest rates won’t necessarily rise when unemployment hits 7 per cent, nor is 7 per cent a target for the MPC. It is merely a “waystation” for the MPC

Financial analyst Brenda Kelly tweets:

There will also be two “knockouts” for the forward guidance policy.

the MPC’s intention not to raise Bank Rate above 0.5% will cease to apply if, in the Committee’s view, it is more likely than not that inflation 18 to 24 months ahead will be half a percentage point or more above the 2% target

Carney: There should be little satisfaction that the UK economy is growing again

Carney is now taking questons

Jamie Chisholm, FT markets commentator notes unusual moves in the markets

Sterling is falling sharply but Gilt yields are rising

First question from the Guardian, on the relationship between unemployment and inflation. Carney says productivity is 15% below pre-crisis trends. It’s the MPC’s best judgement that there is a “margin of productivity” that can be recovered as the economy recovers.

This is about the UK’s “productivity puzzle” – no-one is sure how much of the fall in UK productivity is structural and how much is related to the swings in the economy. Here’s a good piece on this by Gavyn Davies

Next question from the Observer. To what extent is the government’s fiscal policy to blame for high unemployment?

Chancellor George Osborne has written to Mark Carney on his statement. He is broadly positive.

Osborne writes:

I agree with you that forward guidance can play a useful role in enhancing the effectiveness of monetary policy and thereby supporting the recovery. I take note of the comprehensive arguments the MPC has set out for the choice of an unemployment threshold. I also note the Committee’s important approach of allowing the threshold to be ‘knocked out’ if there are material risks to price stability or financial stability.

I can confirm that this approach is consistent with the remit set out at Budget.

Carney chooses to explain why he chose unemployment as a threshold. Stresses again it is not a target but a “summary indicator” of conditions in the economy. He dodges the question about fiscal policy altogether – not surprisingly.

Here is Osborne’s letter to Carney…3-08-06-164907.pdf

Reuters asks whether Carney shares concerns the Help to Buy scheme will create a housing bubble. (Fitch was the latest organisation to raise this possibility only yesterday.)

More from FT markets correspondent Neil Dennis

Britain’s equity market, sterling and UK government bonds, are all lower after the statement, but the pound, after a brief jolt of more than 1 per cent lower, is recovering the levels seen ahead of the statement.

Sterling is down 0.6 per cent to $1.5257 against the dollar, having stood at $1.5291 ahead of the statement.

The euro is up 0.4 per cent to £0.8704. It was at £0.8674 before

The yield on the benchmark 10-year Gilt is up 3.8 basis points at 2.51 per cent, sending prices lower. The yield had been down 3 basis points at 2.45 per cent.

The FTSE 100 is down 48 points at 6557. It was down just 10 points ahead of the statement.

Carney says Help to Buy and the housing market are things the BoE “watch closely” but says you have to put recent developments in historical context. Mortgage lending is still weak, valuations are still “quite a bit off”, activity still fairly low.

Spencer Dale, BoE chief economist, chips in on Help to Buy. “The idea it’s fueling a housing boom doesn’t stack up in terms of the numbers”.

Carney is asked about how the 7% target might be reached. He says the MPC has provided various growth scenarios with the forecasts. He accepts there will be difference views within the MPC but expects these to coalesce relatively easily.

Carney says is the economy falters, MPC members still free to vote for more asset purchases. (QE not entirely dead, then).

Question on whether the UK economy has reached ‘escape velocity’. Carney says the UK is not there yet. Need to get to the historical average. The guidance provides criteria for whether it’s there

There’s a question on the nature of the economy recovery – is it sustainable, or does it rest (as the TUC and Niesr argued this week) on fragile foundations. Consumer spending has been supported by falling savings rates rather than rising real incomes.

Carney says consumption growth is broadly in line with income growth in the BoE’s forecasts. “We do not expect material increase in borrowing” over the next few years. There is an important contribution from housing, he says, with business investment picking up later.

Question on Bank of International Settlements concerns about long period of negative interest rates. Carney says a prolonged period could, if left unattended could lead to vulnerabilities. But it’s not necessary to have a financial stability knock-out to address the issues the BIS was addressing.

Vicky Redwood, an economist at Capital Economics, has sent a note out to clients on what the new policy means. Here’s a clip.

This is a clear steer that interest rates will stay on hold until the end of 2016 or even 2017. Admittedly, this is all subject to three “knock-outs”, i.e. inflation expected to be within 0.5% of its target in 18-24 months, inflation expectations remaining contained and there being no financial stability threat from keeping rates low. But today’s forecasts show inflation likely to meet this condition comfortably. Although financial markets already expected rates to stay low for a long time, this probably exceeds their expectations.

Jamie Chisholm, FT markets commentator, says that sterling has pared almost all its losses against the dollar.

It was down almost 150 pips at one stage. It’s now down only eight pips. Clearly forex traders are having difficulty figuring what all this means.

Carney: In terms of the actual credit creation that underpins the economy – there’s some but it’s not a return to the double digit levels we saw pre-crisis

Some context on the 7 per cent unemployment threshold: the unemployment rate is 7.8 per cent now, but the forecasts the MPC published today do not see it falling to 7 per cent until after the “forecast period” (the third quarter of 2016).

That might sound pessimistic, but it’s because the MPC thinks productivity will pick up, allowing companies to grow for a while without hiring more people.

The FT’s Claire Jones asks whether everyone on the MPC agreed on the new forward guidance threshold. Was it unanimous? Carney says she will have to wait for the minutes of last week’s MPC meeting. “You’ll be the first to read it, I’m sure, given your interest.”

Question on whether de facto, the BoE has raised the inflation rate. Absolutely not, says Carney. It’s still 2%

BBC economics editor Stephanie Flanders tweets:

Question on whether the composition of employment will be important, or just the unemployment rate. Carney says the MPC chose the rate for simplicity, but says “we are well aware” that the number of part time jobs has increased, while average hours worked are still lower than the peak.

Question on rebalancing of economy: Carney says there’s the process of deleveraging households and instiyutions. Institutions have derisked their businesses to some extent. There has been progress. Rebalancing is also needed on fiscal side. The other element is on the external side, Carney says. With the weak global economy that is moving sideways, esp in Europe, the path to sustainable rebalancing is to increase productivity.

Recap: Carney has unveiled a new framework for monetary policy.

1. Interest rates will stay at their record low 0.5 per cent until the unemployment rate falls below 7 per cent.

2. The MPC does not forecast that to happen until after the third quarter of 2016.

3. There are various “knockouts”. The most notable is that the BoE will change tack if the inflation rate is expected to be above 2.5% in 18-24 months time.

Question on what message ordinary businesses should take away


The message is that the MPC is going to maintain the exceptional monetary stimulus until unemployment reaches 7% and then we will reconsider.

We will do this while maintaining price and financial stability.

Reaction is starting to come in. Peter Rollings, CEO of estate agent Marsh & Parsons:

With his statement today Mark Carney has given the UK’s housing market a significant boost. The London market, in particular, is presently underpinned by rising positive sentiment due in part to the Government’s Funding for Lending Scheme and the Help to Buy initiatives as well as strong demand from home and abroad. Growth in the country’s GDP, reduction in unemployment and a feeling that we are finally out of the economic badlands means that the market can now be assured of certainty as far as interest rates are concerned.

This is a highly important statement which will allow lenders to offer attractive fixed rate deals to potential buyers and will surely lead to greater demand and activity in both the resale market and provide a fillip for first time buyers. The Governor is implicitly saying interest rates will not rise until ¾ million more people are in work.

This will give the market across the UK much welcome stability.”

Two questions on whether the BoE is right to only buy government bonds as part of QE. Should it think about other assets? Carney: “It’s not constructive or appropriate to speculate on different policies”. It’s not a question for today.

Michael Hewson, market analyst at CMC markets, has this chart of the market reaction

Question on eurozone risk. Carney says important progress has been made and there remains important work in progress to enhance the potential of the European economy. Monetary measure of ECB have helped contain tail risk in what’s still a fragmented market.
But we should not get ahead of ourselves in terms of expectations of the eurozone. Risks remain.
In order to gain significant exports into Europe, companies will need to build their competitiveness and improve productivity because it won’t come from rising consumer demand.

BBC’s Hugh Pym asks: what’s wrong with policy as it is, why bind your hands? Carney objects to the idea anyone’s hands have been bound. This is the weakest recovery on record, he says. What the MPC is saying here is we need to make more progress before we think about pulling back (on monetary stimulus).

Question on the BoE’s strategy with this statement:
Carney says: “What this does is make monetary stimulus more effective.”
He gives three reasons:
1) Greater clarity about what we’re trying to achieve – what’s the path the MPC thinks is best for the economy.
2) Reduces uncertainty
3) This provides a robust framework to test how much excess supply there is in the economy, within the labour market and within companies.

Carney tells ITV News reporter to read page 7 of the Inflation Report in response to question about unemployment. “I can read it to you if you like”. Ouch.

More from FT markets correspondent Neil Dennis:

Sterling is now 0.2 per cent higher at $1.5381 as investors speculate that the Bank may have to react to inflationary pressures before the unemployment rate falls to 7 per cent.

Here’s what James Knightley at ING has to say:

In our view there is still significant uncertainty on the outlook for growth, but we are becoming increasingly optimistic on the prospects. Consequently, we still believe that interest rate rises are more likely to start in early 2015 than the second half of 2016.

From Channel 4 News’s Faisal Islam:

Question on whether rising house prices would be a measure of success:

Carney says the MPC judges success by achieving the inflation target. The challenge is how to get there. We don’t target asset prices. We target CPI inflation. Within the broader responsibilities of the BoE, there is great interest in issues like rising house prices

That’s the end of the press conference. Stay with us for more reaction and analysis

Here’s a quick summary of what the Bank of England has announced today under Mark Carney.

1. It has said interest rates will stay at record low levels until the unemployment rate falls to 7 per cent.

2. The MPC doesn’t expect that to happen until mid-2016 at the earliest.

3. There are three “knockouts” that would make the BoE change tack: if inflation was set to be 2.5 per cent or higher in the medium-term; if inflation expectations were getting out of control; if the stance was threatening financial stability.

This is Carney’s summary of what he wants the public to understand:

The message is that the MPC is going to maintain the exceptional monetary stimulus until unemployment reaches 7% and then we will reconsider. We will do this while maintaining price and financial stability.

FT editor Lionel Barber admires Carney for his “bold” statement:

Allan Monks, an economist at JP Morgan, thinks the unemployment rate (ILO) might well fall from 7.8 per cent to 7 per cent sooner than the MPC predicts.

The ILO is very difficult to forecast, reflecting several moving parts. Over time there are risks that labor supply (currently high) weakens, and a risk that the productivity drop has more longevity, implying the ILO could fall more quickly than the BoE expects. This may cause the BoE to bring forward its forecast for the ILO dropping below 7% (e.g. to late 2015) at some point next year. For now, what matters most is the BoE forecast for the ILO, until the data over time start to challenge that forecast. All this is conditioned on our growth forecast and the assumption the Euro area evolves as we expect. But the risks to our growth forecast are to the upside, and we think the ILO will drop below 7% around six months earlier than the BoE.

Sunday Telegraph business editor Kamal Ahmed tweets reaction from the Institute of Economic Affairs, a free-market think-tank:

The markets are starting to settle, a bit. Here’s FT markets reporter Neil Dennis’s verdict:

Equity markets still don’t like it – FTSE remains down 51 points, or 0.8 per cent, at 6,552.3.
Bond investors don’t like it. Yield on the 10-year Gilt is up 3bps to 2.51 per cent, sending bond prices lower.
But sterling loves it – up 0.5 per cent to $1.5429.

The difference is in their differing reactions to the Bank’s guidance and Carney’s caveats. As Marc Chandler at Brown Brothers Harriman puts it:

Given expectations and the recent data, Bank of England Governor Carney had to thread a needle, being both dovish and optimistic.

Ben Southwood at the Adam Smith Institute has written a blog post titled: Mark Carney bottles it with baby steps.

Mark Carney had the leeway to make radical change here but he’s bottled it with baby steps.

The ‘Carney rule’, promising low interest rates and the possibility of more quantitative easing (QE) until unemployment is low or inflation rises, is definitely an improvement on the current regime. It gives firms clearer guidance on the future stance of policy, removing some of the uncertainty in the world economy today. I expect it to deal with some of today’s demand shortage, and more importantly tomorrow’s expected demand shortage.

But unemployment and inflation come from both aggregate demand (which the bank can control) and aggregate supply (which it has essentially no control over). Since neither of these numbers distinguish between changes in supply or demand, the Bank is still fumbling in the dark with its guesses over whether a change in inflation comes from demand (which means it should react) or supply (which means it shouldn’t). This means firms are still left guessing, and it means that uncertainty still reigns.

What we really need is a truly rule-based system that takes discretion away from nine ‘wise men’ and uses market forecasts to create real stability. That system is nominal income targeting.

John Authers, the FT’s senior investment columnist, says:

The message Carney wanted to get across very clearly was that bond yields have gone up too high. However judging by the response in the bond and currency markets so far, people are interested by the absence of any criteria for raising asset purchases and by how finely balanced the bank’s own projections are on when they’ll reach their unemployment threshold and when they’ll reach the “knock-out” rate on inflation.

Mark Carney has also written to Chancellor George Osborne . He reprises what he said at the press conference, most notably that forward guidance enhances the effectiveness of “the exceptionally stimulative monetary stance”.

Martin Sandbu, the FT’s economic leader writer, believes this is a significant day in the history of the Bank of England:

George Osborne went out to find the most activist monetary policymaker money could buy, and he clearly got what he bargained for.

This is regime change in Threadneedle Street.

Governor Carney has gone for a firm forward guidance policy – more akin to the Fed than to the ECB’s half-hearted version. There was no mincing of words here: Mr Carney said explicitly that markets were wrong in their forecasts of when the Bank would raise interest rates.

The question now is whether markets will accept Mr Carney’s correction; whether banks will transmit lower rate expectations to the real economy; and whether real activity will pick up as a result. Given the broken state of Britain’s banking system, those are three big ifs.

As Mr Carney admitted, guidance is an attempt to make the current policy stance more effective, not to loosen the stance further. Unless the current pick-up in the economy persists and even strengthens, the new governor may want to consider outright loosening too.

More from John Authers, the FT’s senior investment columnist:

The ultimate messages that anyone trading in the markets should take from all of this are as follows:

First, markets will be ever more data-dependent. And despite Mr Carney’s frequent protestations, they will have to behave as though the Bank of England has taken on a mandate for both employment and inflation, because decisions from now on will have as much to do with unemployment as inflation.

Second, any more new “QE” flows of asset purchases look highly unlikely (barring some horrific accident somewhere else in the world economy). There are no criteria whatever to govern how they would be decided on. The job of today’s exercise, quite explicitly, was to chart an exit from the extremely stimulative policies that remain in force. Implicitly that means fresh QE is probably over. The stock of bonds held on the Bank’s balance sheet will remain constant, meaning that it will buy bonds to replace those that mature, but this is not as important as the flow of new assets into the Bank, and that has halted.

Third, the balance of probabilities remains very firmly that the bank rate is not moving above 0.5 per cent for a matter of years rather than months. That is the Bank’s own assessment of the balance of probabilities, and there is no reason to dissent from it. There is reason, however, for gratitude that everyone can now trace that balance quite so clearly.

Andrew Smith, chief economist at KPMG:

Will it work? Having experimented with QE, we are now moving further along the spectrum of unconventional policies. It should be remembered that, by definition, unconventional measures are untried, untested and uncertain.

But the big change is that, with this addition to its armoury, the [Monetary Policy] Committee has turned unashamedly pro-growth and now looks more prepared to use all the weapons at its disposal if the recovery fails to live up to expectations.

John Longworth, director general of the British Chambers of Commerce, said Mark Carney’s announcementswere a “positive development” and would “reassure business”:

We agree with the committee that a decline in the unemployment rate to seven percent is unlikely in the next few years, so it looks as though interest rates will remain low for quite some time. This will give businesses a much-needed confidence boost when looking to invest, as they know that any plans will not suddenly be derailed by a hike in interest rates.

However he would have liked to have heard “something concrete” on how the MPC plans to underpin the recovery.

We would urge the Bank of England to use its balance sheet to further capitalise the British Business Bank or underwrite private investment in infrastructure projects, as this would help to secure the long-term economic future of the UK

Simon Wells, an economist at HSBC said:

By using an unemployment threshold that it predicts won’t be breached until mid-2016, Mr Carney tried to be as dovish as he could.

But given uncertainties and the various ‘knock-outs’, guidance so far out can’t be fully credible. The near-term implications are clear though: policy will be loose for a long time despite the recent strong data.

A different take Ross Walker, economist at RBS, who believes the BoE’s forward guidance is more nuanced and qualified than expected – and therefore less dovish than expected:

As expected, the unemployment rate was adopted as the ‘intermediate threshold’, but the 7% rate and other conditionality – ‘knockouts’ relating to CPI inflation and broader financial stability considerations – leave the overall impression of a less dovish policy signal than expected.

In terms of time-scale, much will hinge on the outlook for the unemployment rate, where the MPC’s central projection is for a relatively slow-paced decline given the growth outlook being signalled by the business surveys. Forward guidance is less dovish in the detail.

The Institute of Directors is not cheering Carney’s forward guidance. Graeme Leach, IoD chief economist. reacted thus:

Forward guidance doesn’t really take us forward, and we are very concerned at the use of monetary policy to chase unemployment.

We’re still looking at an economy which will struggle to reach trend growth, let alone exceed it. We’re looking at a moderate growth spurt over the next 12 months but the new normal could be GDP growth of below two per cent thereafter.

To get growth above two per cent on a sustained basis we need a productivity surge. And to get a productivity surge we need radical supply side reforms which are unlikely in the run up to a general election.”

Mark Carney does have fans, however, at the Federation of Small Businesses. John Allan, National Chairman, described the forward guidance as “bold and imaginative thinking to secure the recovery”.

With around 750,000 new jobs needed before unemployment reaches the seven per cent rate, the FSB believes that the historically low interest rate will remain for some time to spur on growth. The safeguards – or knock-outs – in place should help to protect the economy from financial instability.

However, for firms to invest, grow and create jobs, they need to access finance. We are pleased to see the strengthening evidence in the report that Funding for Lending is helping small businesses access credit at cheaper rates. But while the banks have reserves of credit available around four in 10 firms are still refused their application.

Ed Balls MP, Labour’s shadow chancellor, is not surprisingly, trying to score political points from Mark Carney’s performance.

By recognising the importance of policy action to support jobs and growth, at last we are seeing the Governor show the leadership we have failed to see over the last three years and are still not seeing from the Chancellor.

Mark Carney is right to warn that the recovery is weak. It is the slowest on record and families are facing a growing cost of living crisis.

But the new Governor is not a miracle worker and monetary policy cannot do the job alone. As we and the IMF have consistently said George Osborne must finally act to support the economy and also help families feeling the squeeze.

This new approach will require careful vigilance from the Bank of England. Given the high inflation we have seen over the last couple of years it will be very important that the MPC stays vigilant to inflationary risks. But of course the reason why the Bank is having to take this new approach is because, as their report says, government policy has ‘weighed on output growth over the past three years and will continue to do so’.

Prime Minister David Cameron has yet to respond. FT political correspondent Jim Pickard says he is at the North Devon Show, where he accidentally insulted the very popular Chivenor Military Wives Choir by saying they “get around a bit”.

Anyone looking for a steer on when unemployment might fall to 7% should remember that the Office for Budget Responsibility forecast in March – which was admittedly before the latest improvements – that the MPC target level would be reached in 2017. Its forecasts are 7.4% for 2016 and 6.9% for 2017.

The Treasury has forwarded this reaction from Chancellor George Osborne, given to an unnamed reporter:

GO: Well, I asked the Bank of England earlier this year to think about whether they should give more information about the future rates of interest, and I very much support the decision that Mark Carney has announced today. I think it means, for hard-working families thinking of taking out a mortgage or a business, thinking about expanding and taking out a loan to expand – they’re going to have greater certainty that interest rates are going to stay low for longer. And that is part of our economic plan: to move this country from economic rescue to economic recovery, and so I think it’s very welcome news.

Unnamed reporter: When Mr Carney used this policy in Canada, he changed his mind and ended up changing interest rates. What’s to say [as heard] that he won’t do that here?

GO: Well, look, the Governor and the Monetary Policy Committee will speak to… their decision on the forward guidance but I think they’ve set it out very clearly, linking the rates of interest to unemployment and making it clear that there are certain conditions around inflation that they will take into account. But, you know, that’s their decision – they’ve set it out, and I think their information is pretty clear to people.

UR: And is it wise to link monetary policy to the labour market, or will this fuel inflation?

GO: Well, I’ve asked the Bank of England to look at the case for this forward guidance on interest rates. They have done that. They’ve made it absolutely clear – as I did in the remit that I set the Bank of England – that this is all in the context of price stability, making sure we keep a control on inflation, but also making sure that monetary policy helps support the economic recovery – and that’s what I’m clear it’s going to do. Thank you very much.

Claire Jones, FT economics reporters, says in this video that Mark Carney has passed his first major test “with flying colours”.

Here are some charts from the BoE’s forward guidance document This one on the likely path of unemployment in the years ahead is arguably the most important since that is what Mark Carney has tied interest rates to. The darker the shade of blue, the more likely the path.

This one is on GDP projection

This delves a little deeper into the GDP projections

Jonathan Eley, the FT’s personal finance editor, gives his reaction to forward guidance:

An effective commitment to ultra-low interest rates for an extended period is likely to mean that retail investors will continue to move out of cash and into riskier assets, especially ones that offer income such as some equities and retail-orientated bonds. Savings rates will remain poor, at least until Funding for Lending ends in 2015. The ‘knock-out’ condition of forecast inflation being 0.5 percentage points or more over target will not be much consolation because it is so subjective.

Fresh QE looks a remote prospect, so gilt yields are unlikely to fall much – but nor do they look set to rise, meaning more difficult decisions for those in or nearing retirement.

Mortgages look set to remain very cheap by historical standards, while both the Bank and the government seem unperturbed by talk of a house price bubble. So property will remain a very good investment for those that can afford it. Perhaps that is exactly what George Osborne intended, with an election due in 2015

An interesting take on the 7% unemployment threshold comes from Esmond Birnie, PwC’s chief economist in Northern Ireland, who is analysing forward guidance from a not-in-London perspective:

Growth, relative to the pre-crisis years will remain modest for the foreseeable future, with a distinct regional split.

More than half of all new private sector jobs have come from London and the South East, with growth in those regions alone for 2013 forecast as 1.2% and 1.4% respectively.

That is well ahead of regions like Northern Ireland and the North East of England that are projected to grow by a mere 0.5% in 2013 – half the forecast UK average.

That means UK average unemployment could hit the Bank’s 7% target while some regions are still struggling to deliver confidence, investment and growth.

The new governor has delivered a useful message to encourage recovery, but some regions are going to have to run very hard indeed to match even average UK growth, let alone that of London and the South East.

Markets update from Neil Dennis on the FT’s markets desk.

As we move into the last hour of trade on London’s stock exchange, the FTSE is down 1.1 per cent at 6,528.9. After Mr Carney’s statement UK equity investors expect no further stimulus.

Bond markets too are disappointed that there appears to be little likelihood of further Gilt purchases by the Bank of England on the scale of the £375bn asset purchase programme. The yield on the 10-year Gilt is up 3 basis points at 2.51 per cent.

Sterling, however, is up 1.1 per cent to $1.5517 against the dollar – more than 3 cents from its lowest mark of the day – on speculation that the recovery will gain momentum.

We’re going to wrap up now, thanks for all your comments. Here’s a summary of what the Bank of England has announced today.

1. Interest rates will stay at record low levels until the unemployment rate falls to 7 per cent. But Governor Mark Carney stressed that this was a threshold not a trigger.

2. The MPC doesn’t expect that to happen until mid-2016 at the earliest.

3. There are three “knockouts” that would make the BoE change tack: if inflation was set to be 2.5 per cent or higher in the medium-term; if inflation expectations were getting out of control; if the stance was threatening financial stability.

This is Carney’s summary of what he wants the public to understand:

The message is that the MPC is going to maintain the exceptional monetary stimulus until unemployment reaches 7% and then we will reconsider. We will do this while maintaining price and financial stability.