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August 09, 2013

Interest rates 'unlikely to increase' for years

New Bank of England (BoE) governor Mark Carney has said interest rates are unlikely to increase from 0.5% until the UK unemployment rate falls to 7% or below.

Currently it is 7.8%, which means an additional 750,000 jobs would need to be created before the BoE Monetary Policy Committee (MPC) would consider increasing interest rates – which could take three years, experts say.

The Canadian central banker, who recently took over from Sir Mervyn King and supports providing markets and businesses with 'forward guidance' on interest rates, told the BBC: "We need to provide as much clarity and certainty about the path of monetary policy so that people at home [and] people who are running businesses can make decisions with greater certainty about what is going to happen with interest rates."

Business groups largely welcomed the guidance. John Longworth, director general of the British Chambers of Commerce (BCC), commented: "The introduction of a 7% unemployment threshold before the [MPC] considers tightening monetary policy will reassure business. We agree that a decline in the unemployment rate to 7% is unlikely in the next few years, so it looks as though interest rates will remain low for quite some time.

"This will give businesses a much-needed confidence boost when looking to invest, as they know that any plans will not suddenly be derailed by a hike in interest rates. We are also pleased that Mark Carney has shown his commitment to the 2% inflation target, as we believe that higher inflation damages growth prospects."

John Allan, national chairman of the Federation of Small Businesses (FSB), said: "Forward guidance linked to unemployment is a profound shift in monetary policy for the Bank of England. We welcome this bold and imaginative thinking to secure the recovery. In the longer term, we hope it will give investors and firms looking to grow confidence to bring forward work that will increase employment."

Graeme Leach, chief economist at the Institute of Directors (IoD), was less positive. He said: "Forward guidance doesn't really take us forward, and we are very concerned at the use of monetary policy to chase unemployment.

"We're still looking at an economy which will struggle to reach trend growth, let alone exceed it. We're looking at a moderate growth spurt over the next 12 months, but the new normal could be GDP growth of below 2% thereafter.

"To get growth above 2% on a sustained basis we need a productivity surge. And to get a productivity surge we need radical supply side reforms, which are unlikely in the run up to a general election."

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