Rock bottom rates may be here for even longer

Tim Wallace
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INTEREST rates could stay at rock bottom for even longer than the Bank of England has promised, senior official Charlie Bean told MPs yesterday.

The Bank has said it will consider raising rates when unemployment falls to seven per cent.

But if inflation is at or below its two per cent target, the Bank could decide to wait until unemployment is down to 6.5 per cent, Bean told the Treasury Select Committee of MPs.

“I am not resetting the forward guidance now, but as we get to the threshold there is a question over what comes afterwards,” said Bean.

“We will have learned quite a lot over the journey to the seven per cent threshold and I would expect that as the monetary policy committee gets close to that it will feel in a better position to decide what is likely to happen next.”

If productivity has increased and inflationary pressures are low, that could mean issuing new guidance with a lower unemployment threshold, he said.

The Bank introduced the policy of forward guidance in the summer, initially predicting unemployment would fall to seven per cent by mid-2016. However the economic recovery since then has been stronger than expected, pushing the Bank to bring that date forwards to late 2014 or early 2015.

Meanwhile Bank of England governor Mark Carney said house prices will not stop rising any time soon.

“There is momentum in the housing market. We expect that near-term momentum will be sustained for a period before ultimately house price growth will be more consistent with normal income growth,” he said.

But he does not expect the chancellor’s Help to Buy scheme, which subsidises mortgages for buyers with a small deposit, to boost building as the government hopes it will.

“I don’t see a marked rise – there are a variety of impediments, including planning,” Carney said.