Wednesday, November 13, 2013
The Bank gets into an unemployment muddle
Posted by David Smith at 06:30 PM
Category: Thoughts and responses

Read the opening statement by Mark Carney today in presenting the Bank of England's inflation report and this is clearly a man who does not want to raise interest rates for a considerable time.

He said: "A sustained recovery requires confidence that exceptionally stimulative monetary policy will be maintained in the face of weak foreign demand and on-going repair of household, bank and government balance sheets. Our forward guidance means the MPC will not even consider raising Bank Rate at least until the unemployment rate reaches 7%. Through that guidance we are giving businesses and households the confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace."

And: "It is important to remember that the unemployment threshold is a staging post for assessing policy, not a trigger for an automatic increase in Bank Rate. When the threshold is reached, the MPC will set policy to balance the outlook for inflation against the need to provide continued support to the recovery in output and employment."

He concluded by saying: "We will continue to provide exceptional monetary stimulus so that British households and businesses have, for the first time in a long time, the confidence not just that the glass is half full, but that it will be filled."

Now contrast that with the Bank's new forecasts, which on the same basis as its predictions in August (constant interest rates) have unemployment reaching 7% in late 2014 (not 2016 as in August). Even on the market assumption that rates gradually rise (which seems an inconsistent assumption for the Bank to use) 7% is achieved by mid-2015.

How do we square these two things? The Bank, in specifying forward guidance on the basis of the unemployment rate (albeit a threshold not a trigger) has made a rod for its own back. It should have found an alternative way of saying it would give the economy time to breathe. More on this on Sunday. In the meantime, Governor Carney's opening statement is here, and the inflation report here.