Bank Base Rate to stay at 0.5% until 2016 (…probably)

/in , , , /by

Bank Base Rate changesMark Carney, the Bank Of England’s new Governor, has announced his ‘forward guidance’ that the Bank does not intend to raise Bank Rate from 0.5% until the unemployment rate falls to 7%, which it forecasts will happen in mid 2016 — three years away. The Governor hopes that the announcement of this 3 year plan will instil confidence in the economy and help to encourage companies and consumers to borrow money without having to worry about any sudden, unforeseen rises in interest rates. It may well help, but of course it does hinge on that all-important unemployment rate falling to the desired level.

The Governor also stated 3 additional scenarios in which earlier action would become necessary:

  1. If the Bank considers it more likely than not, that CPI (Consumer Price Index) inflation will be 0.5 percentage points or more above the 2% target within the next 18 to 24 months;
  2. If medium-term inflation expectations no longer remain “sufficiently well anchored”; and
  3. If a ‘significant threat to financial stability’, related to the continued low rates and FPC policies, arises.

(More information is available at the Bank of England site here).

So while a 3 year forecast is to be welcomed by businesses and consumers, particularly those who wish or need to borrow money, a forecast is not as watertight as an absolute promise — but it should certainly help and Mr Carney has had some success with this approach in his previous post at the Bank of Canada. Fingers crossed!