BOE Sees Case for Record-Low Rate Beyond 7% Jobless
Bank of England officials voted unanimously to keep policy unchanged this month and said a record-low interest rate may be needed even after unemployment falls to the threshold set under forward guidance.
“There were uncertainties over the durability of the recovery,” the Monetary Policy Committee said in the minutes of its Nov. 6-7 meeting, published in London today. “With the proviso that medium-term inflation expectations remained sufficiently well anchored, the projections for growth under constant bank rate underlined there could be a case for not raising bank rate immediately when the 7 percent unemployment threshold was reached.”
Under the guidance introduced by Governor Mark Carney in August, the MPC has said it won’t consider raising its key rate from 0.5 percent at least until joblessness hits 7 percent. In forecasts published this month based on no change to the benchmark rate, it saw that threshold being hit at the end of next year.
The pound erased its gain against the dollar after the minutes were published before recovering. It traded at $1.6143 as of 11:37 a.m. London time, up 0.1 percent from yesterday.
Federal Reserve Chairman Ben S. Bernanke delivered a similar message yesterday, saying the Fed will probably hold down its main interest rate long after ending $85 billion in monthly bond buying, and possibly after unemployment falls below its threshold.
“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate breaches 6.5 percent, he said in a speech in Washington. A “preponderance of data” will be needed to begin removing accommodation, he said.
The BOE minutes showed that at the November meeting, the MPC voted 9-0 to keep the benchmark unchanged and the asset-purchase program at 375 billion pounds ($605 billion). It also said that the inflation and financial-stability knockouts that form part of the guidance policy hadn’t been breached.
“Once unemployment had reached 7 percent, the committee would reassess what it had learned about the nature of the recovery,” the MPC said. “In the meantime, the committee would continue to judge the appropriate stance for policy each month in line with the guidance given in August.”
The MPC said that data over the past month had not changed its view materially. The collective view was that productivity was “likely to increase over the forecast period as the economy recovered, albeit by less than demand, such that slack in the economy was eroded only gradually.”
“The Bank of England is stressing that significant growth headwinds persist, there is still a lot of slack in the economy and conditions are yet to fully normalize,” said Howard Archer, an economist at IHS Global Insight in London. It “wants to give the economy every chance to develop sustainable decent growth and not to risk choking it off.”
The committee said a recent increase in inflation expectations was of “little economic significance” and in the medium term they were “well-anchored.” The pickup may have been partly due to utility-price increases and may unwind, the minutes said.
The MPC said the stronger pound would put downward pressure on price growth next year, “although it was unclear how much of this would be passed through to consumer prices given the more favorable domestic demand environment.”
The MPC said upside risks to growth included greater confidence in the recovery and looser credit supply, while downside risks came from household and bank balance-sheet repair and vulnerability to adjustments in Europe and some emerging-market economies.
“With the external environment unlikely, therefore, to be an engine of U.K. growth, and given that the domestic fiscal consolidation would continue over the forecast period at around its current rate, a successful handover from household to business spending would play a crucial role in underpinning the recovery in the medium term,” the minutes said.
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