Interest Rate Link to Unemployment Cancelled

Interest Rate Link to Unemployment Cancelled.

Mark Carney, the Governor of the Bank of England, yesterday confirmed a total U-turn on Bank of England policy for setting interest rates.

Last, and indeed in the Chancellor’s Budget speech, it was confirmed that the Bank of England would use forward guidance in central bank base lending rates were set.

Previously, inflation used to be the benchmark at which interest rates were set and then in a move away from inflation last year, the Budget speech confirmed that a “forward guidance” policy was to be introduced and then the new Governor of the Bank of England, Mark Carney, confirmed that the forward guidance for an interest rate change would be when unemployment in the UK fell to 7%.

Recent unemployment figures following a buoyant economy have seen unemployment rates fall to near 7% with mounting pressure as to what action the Bank of England would do with regard to interest rate increases.

Mr Carney suggests that the recovery is still fragile hence not risking any interest rate increases despite unemployment falling dramatically.  From now on the Monetary Policy Committee (MPC) will monitor a range of 18 different indicators from economic spare capacity, unemployment, part time work through to the usual inflation measures.

Comment

Surprised?  No we are not.  We have said all along that this is a smoke screen as this government, and indeed the next whether it is blue, red, yellow or green, needs inflation.

There is a conflict of interest with both the Bank of England and government needing inflation to devalue public sector debt, for property prices to keep climbing to reduce pressure on State owned banking groups with toxic property debt as property prices recover.  Indeed, the Government stands to make £billions if property prices rise as part of their Help to Buy mortgage deposit scheme for first time buyers.

That said, Mr Carney suggests that there will be no knee jerk reaction and interest rates will increase again “when the time comes”  and only at a gradual increase rather than large increases.

Stability is good for businesses to plan for expansion but we suspect this is also about ensuring wealth grows and positive public sentiment increases ahead of next year’s election.