BANK of England rate-setter Ben Broadbent has tried to ease concerns that the central bank will be forced to raise the cost of borrowing more quickly than expected because of falling unemployment.
Interest rates are set to remain on hold until the jobless level, which currently stands at 7.7 per cent, falls to 7 per cent. The Bank expects this will not happen until 2016, but some observers believe this threshold could be reached as soon as 2015.
However, Broadbent said arguments that this could force the Bank to make a move sooner than governor Mark Carney has predicted were “decidedly odd”.
The former Treasury economic adviser, who joined the monetary policy committee (MPC) in 2011, said last night: “There is no promise unconditionally to keep interest rates fixed for a particular length of time.
“What we have pledged to do – and the clue is in the word ‘conditional’ – is to examine the case for a withdrawal of monetary stimulus only after a significant fall in unemployment and as long as the inflation and financial stability ‘knock-outs’ have not been breached.”
MPC members have voiced frustration that governor Mark Carney’s policy of “forward guidance” has been misinterpreted as a trigger for rate rises, stressing that a fall in the jobless level as the economy recovers is not “mechanically linked” to higher borrowing costs. The Bank expects economic growth of 0.7 per cent in the third quarter, up from its 0.5 per cent estimate in last month’s inflation report.
Although Carney’s guidance takes unemployment into account, the Bank’s base rate will not rise above 0.5 per cent if the MPC believes inflation will be above 2.5 per cent in 18-24 months’ time, or if there is a risk to overall financial stability.
Inflation dipped to 2.7 per cent last month but remains well above the 2 per cent target, and MPC member Martin Weale has expressed concerns that the long timescale of the inflation “knock-out” could dent confidence in the Bank’s commitment to stable prices.
In his speech at the London Business School, Broadbent said: “If unemployment falls faster than we’re expecting because productivity does less well than in our central projection, or because demand grows more strongly, it would be right to ask whether we should think about withdrawing some of the monetary stimulus currently in place. What’s not to like about lower unemployment?
“If unemployment declines more slowly, it would be right to leave the monetary stance unchanged for that much longer.”