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Interest rates policy to be adjusted

Article By: ,  Financial Analyst
February 12, 2014 9:15 AM

New forward guidance on interest rates is likely to be released by the Bank of England's governor Mark Carney this week.

Interest rates have been at 0.5 per cent – a record low for the UK – for nearly five years but speculation is growing that a change could be just around the corner.

Mr Carney recently stated no changes to rates would be considered by the Bank of England until unemployment in the UK drops to seven per cent. With joblessness figures improving faster than expected, the Bank of England has come under rising pressure to raise rates to a normal level.

Unemployment now stands at just 7.1 per cent, but Mr Carney has clarified that the seven per cent mark is not an automatic trigger for a rise in the UK's interest rates.

His latest forward guidance will be released this week and follows widespread criticism after he first introduced the practice, which is widespread in countries such as the US. Mr Carney's predictions turned out to be off and has led some people to lose confidence in the Bank of England's governor, who is still relatively new to the role after taking over from Sir Mervyn King.

Soft guidance

BBC business editor Robert Peston stated that "soft guidance" is likely to be released by Mr Carney when he speaks this week. He said: "I expect him [Mr Carney] to say that he expects interest rates to remain at their current low levels for some considerable time. And to repeat that as and when they do rise, they will not return to the levels we took for granted as normal in the boom years."

Interest rates in the UK have been kept low to increase confidence in the economy, but when the increase comes it will have a large impact on members of the public such as mortgage holders.

Chris Williamson, chief economist at Markit, predicted that more indicators such as wage growth will be relied on by the Bank of England as it sets interest rates, rather than just unemployment.

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