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Bank of England ties rate rise to unemployment fall

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Mark Carney, the new Governor of the Bank of England has certainly made his mark. A few weeks back – he opened up a ‘forward guidance’ policy front, pledging to keep interest rates low for a specified period, thus allowing markets, lenders and borrowers to plan their future dealings with the security of forward knowledge.

He has now set a fresh condition for the raising of interest rates, tying them to the unemployment rate. He committed to keep rates on hold until the official unemployment figures fall from the current rate of 7.8pc to 7pc. Mr Carney said that effectively meant that meant that more than 750,000 extra jobs would have to be created before the end of 2016 for rates to start rising again.

This came on the back of a succession of vastly improved forecasts for the UK economy. The Bank of England upgraded its growth forecast for 2013 from 1.2pc to 1.4pc and for next year from 1.7pc to 2.5pc. Mr Carney stated that “a renewed recovery is now underway”, citing a rise in consumer spending as the reasons for the new found optimism.

He did however caution that the country had not yet reached “escape velocity” – by which he meant stand alone economic growth without artificial injections of steroids like Quantative Easing and long periods of low interest rates.

“This is the slowest recovery on record... There is understandable relief that the economy has begun growing again. But there should be little satisfaction,” he said. “We’re approaching levels of growth that could begin to be described as the historical average.”

The pledge to link rises in interest rates to job growth was broadly welcomed across the spectrum, although it must be noted that the promise comes with 3 built in ‘get out clauses’ or ‘knockouts’.

These would apply if inflation was expected to be above 2.5pc on a 18-24 month projection, if public expectations of inflation rose to panic levels, or if low rates were creating an asset bubble that looked likely to crash over the longer term.

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