New BoE chief ties rates rises to fall in unemployment

The Bank of England broke with tradition today, saying it planned to keep interest rates at a record low until unemployment falls to 7 per cent or below, which it views as unlikely for another three years.

But its attempt to steer expectations about future rate moves and bolster a fledgling economic recovery underwhelmed investors who brought forward expectations for when rates would rise from a record low - the opposite of what the central bank was hoping for.

Mark Carney, who took over as governor just over a month ago, said a recovery in Britain's economy was underway and appeared to be broadening but had a long way to go.

“We’re not at escape velocity right now,” he said at his first BoE news conference. “This remains the slowest recovery in output on record.”

The Bank said it would consider raising rates if the public’s medium-term inflation expectations rise dangerously high; if it forecasts that inflation in 18-24 months will be at 2.5 per cent or higher; or if ultra-low rates pose a threat to financial stability, possibly a nod to Britain’s housing market.

Economists said those caveats raised questions about how long the forward guidance was good for and could make it harder to understand for households and businesses whom the Bank wants to reassure that borrowing costs will not be rising any time soon.

Mr Carney suggested to reporters he was not concerned with signs of a recovery in property prices.

The US Federal Reserve last year launched a similar plan to keep its interest rates near zero until unemployment falls to 6.5 per cent or inflation expectations top 2.5 per cent.

"The forward guidance contained in the inflation report was broadly expected but what was unexpected were the get-out clauses," said Lena Komileva at consultancy G+ Economics.

“The BoE’s pre-commitment to keeping rates at a record low is not as conclusive as it first appeared.”