BOE’s Carney Ties Easy Money to 7% Jobless Rate

In a letter today to Chancellor of the Exchequer George Osborne, BOE Governor Mark Carney ties the central bank’s forward guidance to the unemployment rate, which is currently at 7.8% in the UK. The BOE’s Monetary Policy Committee (MPC) will keep interest rates near zero until the jobless rate falls to 7%:

In its assessment the MPC has concluded that explicit forward guidance can enhance the effectiveness of the exceptionally stimulative monetary stance in three ways. First, it provides greater clarity regarding the MPC's view of the appropriate trade-off between the horizon over which inflation is returned to target and the speed with which growth and employment recover. Second, it reduces uncertainty about the future path of monetary policy, in particular helping to avoid the risk that market interest rates rise prematurely as the recovery gains traction. Third, it gives monetary policy greater scope to explore the potential sustainable level of employment and output without putting price and financial stability at risk. In these ways, forward guidance can help to secure the recovery that is now in train.

In light of that assessment, the MPC agreed at its meeting on 1st August--and is announcing today--forward guidance about the future path for monetary policy. In essence, the MPC intends at a minimum to maintain the current exceptionally accommodative stance of monetary policy until economic slack has been substantially reduced, provided that this does not put at risk either price stability or financial stability. In practice, that means the MPC intends not to raise Bank Rate above its current level of 0.5%, at least until the Labour Force Survey headline measure of unemployment has fallen to a threshold of 7%. While the unemployment rate remains above 7%, the MPC stands ready to undertake further asset purchases if additional stimulus is warranted. But until the unemployment threshold is reached, and subject to maintaining price and financial stability, the MPC intends not to reduce the stock of asset purchases financed by the issuance of central bank reserves. Consistent with that, the MPC intends to reinvest the cashflows associated with all maturing gilts held in the Asset Purchase Facility.

The MPC doesn’t expect the unemployment rate to fall below 7% for at least the next three years, i.e., after the third quarter of 2016. If the risks to price stability or financial stability increase over this period, then the unemployment threshold will be “knocked out.” This doesn’t mean that the central bank will start raising rates, but it will “reconsider the appropriate stance of policy.”