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Interest rates to stay at 0.5% until unemployment drops

Dan Jones
Written By:
Dan Jones
Posted:
Updated:
07/08/2013

The Bank of England has said it will not raise the base rate of interest before unemployment falls to 7%.

In its quarterly inflation report, the Bank unveiled plans to tie interest rates to the unemployment rate, but added its new ‘forward guidance’ to the market is not  unconditional.

The 7% mark represents the point at which the BoE will “reassess” its interest rate policy, Governor Mark Carney (pictured) said this morning.

The current unemployment rate is 7.8%.

Carney said guidance was also dependent on inflation remaining within 0.5 percentage points of the 2% target on a two-year horizon.

The governor added investors’ rate expectations are still out of sync with the Bank’s own.

“The path of market interest rates implies faster withdrawal of monetary stimulus than appears likely given current output,” he said in a press conference this morning, echoing comments made by the BoE earlier this summer.

The Bank’s median forecast for unemployment in two years’ time is currently 7.3%, according to today’s inflation report, but Carney said longer-term forecasts are still uncertain.

“Unemployment is as likely to reach 7% threshold beyond [a] three-year horizon as before,” Carney said.


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