Bank of England rates unlikely to increase until second half of 2016

The Bank of England has introduced a US Fed style unemployment threshold, of seven per cent. Some analysts had anticipated this.

UK unemployment was at 7.8 per cent in the three months to May. So we'd need about 750,000 more jobs to be created.

In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%.

The guidance linking Bank Rate and asset sales to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached:

in the MPC’s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target;

medium-term inflation expectations no longer remain sufficiently well anchored;

the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability that cannot be contained by the substantial range of mitigating policy actions available to the FPC, the Financial Conduct Authority and the Prudential Regulation Authority in a way consistent with their objectives.

Bank of England governor Mark Carney said that other targets could have been chosen, such as a real GDP, nominal GDP level or other employment indicators.

Jeremy Cook, chief economist at the foreign exchange company, World First, said:

The targeting of 7% unemployment, all things being equal, suggests that interest rates will stay at the current level until Q3 of 2016. Although we doubt a rate cut from the Bank of England is forthcoming, they have kept the door open to further asset purchases given the emphasis that Carney has placed on the fact that market interest rates imply a faster withdrawal of stimulus than is likely.

by tieing Central Bank policy to the Unemployment Rate, the BoE has just become a Political office as much as a fiscal one.

— Joshua Raymond (@Josh_CityIndex) August 7, 2013