THE BANK of England could adopt an unemployment target under incoming governor Mark Carney as industry analysts believe the Canadian has been heavily influenced by policies at the US Federal Reserve.
Carney, who takes the reins at Threadneedle Street next Monday, is expected to indicate he will not raise interest rates until certain economic conditions are met, reassuring markets that easy monetary policy is here to stay for some time.
Fed chairman Ben Bernanke has said that he will consider raising interest rates once unemployment falls below 6.5 per cent.
Analysts from the Royal Bank of Canada Capital Markets, BNP Paribas, Credit Suisse and AXA now think Carney may commit to continuing British QE and hold rates until unemployment falls below a particular level.
Mark Allan, senior economist at AXA investment managers, commented: “There are essentially two options. The first is to mimic the Fed and use unemployment. The second is to target either the level or growth rate of money spending, aka nominal GDP”. Neville Hill, head of European economics at Credit Suisse, suggested that an unemployment threshold would be well understood and updated regularly, without large revisions later on.
With UK unemployment hovering between 7.7 and 7.9 per cent for the past nine months, if such analyses are correct, it could be some time before the Bank decides to tighten policy.
Analysts have also noted that August, rather than July is the most likely time for a change in Bank policy, as Carney will have had more time to settle into his new role.
Jens Larsen, chief European economist at RBC Capital Markets, said: “The chancellor has also requested that the monetary policy committee review threshold policies and public the results alongside the August inflation report.
“We have little doubt that such a threshold policy is coming,” he added.