BoE Governor Affirms that UK Interest Rates to Stay Low

Bank of England (BoE) governor Mark Carney has attempted to convince UK businesses and households that interest rates will not rise earlier than 2016, as part of his amendment of BoE policy to include an element of forward guidance.

He addressed business leaders and chiefs of small to medium-sized enterprises (SMEs) at the University of Nottingham in his first public UK speech since taking over the post at the BoE on 1 July.

Carney has emphasised that the policy of low interest rates, which has seen the UK base rate remain at a record low of 0.5% since March 2009, will be maintained for some time to come in order to facilitate investment and spending.

“The knowledge that interest rates will stay low until the recovery is well established should give greater confidence to households to spend responsibly and businesses to invest wisely,” he said. Carney added that while the US economy has grown 5% since the 2008 financial crisis and China by more than 50%, the UK still produces 3% less than it did at the start of the recession.

In a move similar to that of Federal Reserve chairman Ben Bernanke, who wants US unemployment to fall back to 6.5% before tightening monetary policy, Carney said earlier this month that the UK’s benchmark rate would remain at 0.5% until Britain’s unemployment falls from the current 7.8% to 7%, which he did not anticipate occurring before 2016.

However, recent data indicating that the UK’s economic recovery gathered pace in the second quarter this year triggered speculation that a rate rise is likely before 2016.

Despite this, in his latest speech Carney indicated that the 7% jobless rate threshold would not necessarily trigger an interest rate rise. The BoE will not raise interest rates until “jobs, incomes and spending are recovering at a sustainable pace,” he said.

“The Bank of England’s task now is to secure the fledgling recovery, to allow it to develop into a period of sustained and robust growth. We aim to get there in part by reducing the uncertainty that has held back growth.”

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