POLITICS
12/02/2014 05:37 GMT | Updated 12/02/2014 10:59 GMT

Mark Carney Drops Bank Of England's 7% Threshold For Interest Rates

Mark Carney has radically overhauled the Bank of England's flagship forward guidance policy, dropping the 7% unemployment threshold as a target at which Bank officials would start considering raising interest rates.

This comes as the falling unemployment rate, which slipped to 7.1% in December, blew a hole in the credibility of the Bank's forward guidance as policymakers were repeatedly forced to insist that interest rates would not need to rise in the near future.

In response to a question from HuffPostUK, Carney said: "The objective is not to have forward guidance forever. The objective is to have a recovery that moves into sustainable and balanced expansion."

"Nobody enjoyed the last five years...the test was first about securing the nascent recovery and the message to businesses and households is bank rates will follow the path that is consistent with jobs, incomes and expansion.

"We're not going to take risks with this recovery. Ultimately if the recovery proceeds there will be need for the bank rate to be adjusted, which will be gradual, limited and appropriate."

The Bank of England noted in its inflation report that the unemployment rate has fallen "much more rapidly" than the Monetary Policy Committee and forecast that it would hit 6.9% in January.

Despite the Bank upgrading its growth forecast for 2014 to 3.4% from 2.9%, Carney warned that the recovery "as yet is neither balanced nor sustainable".

“A few quarters of above trend growth driven by household spending are a good start but they aren't sufficient for sustained momentum,” he said.

Carney said that the 7% unemployment threshold was understood by businesses and insisted that forward guidance was "working", however a more "nuanced' form was needed. The Bank said that it expects wages to start rising faster than inflation in the second half of this year.

Policymakers will now assess whether to raise interest rates on four factors: how robustly wages were growing, how quickly productivity recovers in the economy, the sustainability of the recovery and how it decides to wind down its quantitative easing programme, which has so far injected £375bn into the economy in stimulus.

However, the Bank stressed that Britain's economy was too weak for interest rates to rise in the near future, which would mean millions of borrowers would not suffer a rise in mortgage repayments.

Carney said: "If and when the time comes that the economy can sustain higher interest rates, the bank rate will rise gradually."

The Bank said that no interest rate rise would happen before the 2015 general election and it would only rise as high as 1.9% by 2016. Such an interest rate rise would be conditional on the robustness of the economic recovery.

Bank policymakers signalled that they could reverse any interest rate increases if the economic recovery falters. "Similarly, Bank Rate may be increased more rapidly than anticipated if economic developments raise the outlook for inflation significantly," the Bank added.

Bank policymakers judge "that there remains scope to absorb spare capacity" before raising the Bank's 0.5% interest rate, which has stayed at its historic low for five years.

The Bank of England governor already admitted in a speech to business leaders in Davos last month that the policy linking interest rates to unemployment needed to ''evolve''.

Jonathan Loynes of Capital Economics said while the changes could help tackle the problems associated with excessive dependence on one single indicator - unemployment - they could make it more difficult to give a ''clear and straightforward message''.