Mark Carney vows to keep cost of borrowing at record low 0.5% despite policy linking a rate rise to a sharp fall in unemployment
An early increase in borrowing costs was ruled out by the governor of the Bank of England as he insisted that this week’s faster than expected fall in unemployment will not lead to an automatic interest rate rise that might choke off the recovery.
All but burying his “forward guidance” policy of linking an interest rate rise to a fall in the rate of unemployment to 7%, Mark Carney vowed to keep borrowing costs at their record low of 0.5% for the time being. He was speaking a day after it emerged that the unemployment rate fell to 7.1%.
Interviewed on BBC’s Newsnight, Carney rejected the idea that plunging unemployment was a headache for the Bank. “If our forecast is going to be wrong it’s better to be wrong in that direction,” he said.
Carney also said that when the Bank decided to raise interest rates for the first time since the onset of the financial crisis in 2007, the moves would be gradual.
Economists have warned that a rise to around 3% in the interest rate would lead to huge increases in mortgage costs and a wave of repossessions, as well as damage business.
Downing Street and the Treasury have been looking nervously at the politically unpredictable consequences of repeated small interest rate rises before the general election in May 2015.
Although the Treasury maintains that an interest rate rise would help savers and be a sign of an economy returning to normality, No 10 is more ambivalent.
Downing Street feels assured that Carney is a practical Bank governor driven by the state of the real economy, unlike his more academic predecessor Mervyn King.
The governor said the Bank’s monetary policy committee would be looking at all aspects of the labour market and not just the unemployment rate. The MPC had used the 7% figure to enshrine the idea that joblessness would have to fall considerably before he would “even begin to think about” raising borrowing costs.
Some City analysts are expecting Carney to announce in the next few months that he will lower the threshold at which the Bank would consider raising interest rates to an unemployment level of 6.5%.
The governor said that would be decided by the MPC but added that it was “really about overall conditions in the whole labour market”, where productivity remains poor and many people working part-time still want full-time jobs.
Carney said the economy was “coming off a low base” and output was still below the levels when the economy dropped into its deepest recession since the second world war.
“The worst of the crisis is behind us but the financial system is not functioning as well as it could,” he said. “Uncertainty among households and businesses is still preventing investment.”
No 10 remains convinced that a year of growth, so long as it does not tip into over-heating, will ensure Labour’s stubborn opinion poll lead is worn down into 2015.
Although David Cameron urged voters to be patient on living standards, his aides believe average incomes, once tax changes are taken into account, are already starting to rise above prices.
In a speech to business people in Davos, Switzerland, the prime minister will try to present his most optimistic long-term vision of the UK economy for many years , saying Britain can become “the re-shore nation” with businesses bringing production back to the UK, encouraged by cheaper energy costs and the lure of shorter customer chains.
Cameron will hold out the example of the United States where collapsing energy costs owing to fracking have led businesses to relocate back to the US.
He will say: “There is no doubt that when it comes to reshoring in the US, one of the most important factors has been the development of shale gas which is flooring US energy prices with billions of dollars of energy cost savings predicted over the next decade.
“I believe these trends have the ability to be a fresh driver of growth in Europe too. I want Britain to seize these opportunities. I think there is a chance for Britain to become the Reshore Nation.”
Chuka Umunna, the shadow business secretary, said: “The Tory-led government came to office promising an export-led recovery but the UK’s trade deficit is growing. Any help for manufacturers is welcome after three damaging years of flatlining and in a month where factory orders have fallen back.
“But after so many government schemes have failed to deliver for business, manufacturers will want to see what this one offers in practice.”
Cameron’s hopes for a boom built on fracking are not shared by the energy department, which is much more ambivalent about the ability of Britain – for geological, political and environmental reasons – to match the US fracking boom, at least not for more than a decade.
The prime minister will try to rebut internal critics tired of the Tory party’s negativity by striking a more optimistic note. He will say: “For years the west has been written off. People say we are facing some sort of inevitable decline. They say we can’t make anything any more.
“Whether it’s the shift from manufacturing to services or the transfer from manual jobs to machines, the end point is the same dystopian vision – the east wins while the west loses, and the workers lose while the machines win. I don’t believe it has to be this way. If we make the right decisions, we may also see more of what has been a small but discernible trend where some jobs that were once offshored are coming back from east to west.”
To back the rhetoric, UK Trade & Investment will join forces with the Manufacturing Advisory Service to launch Reshore UK, a service to help companies bring production back to Britain.
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