Bank of England unveils new forward guidance policy as interest rates set to remain low ëfor some time to comeí

The Bank of England has announced a change in their forward guidance policy, identifying that they will no longer attach the future of interest rate rises to the unemployment in the country.

Speaking following last weekís meeting of the Bankís Monetary Policy Committee, Bank governor Mark Carney said that interest rates would no longer be attached to any single economic indicator, and instead any decision towards increasing them will be based on a reactionary stance that involves the meticulous assessment of the financial climate in the UK at all times. 

Mr Carney added that the Bank would be retaining interest rates at their low point of 0.5% till at least 2015, arguing that Britainís economy is not yet in a condition where it is balance enough to be able to cope with the ramifications of a premature rise. 

 "Activity is still below its pre-crisis level and the household saving rate is likely to fall furtherî, he said, adding that the Bank ìwill not take risks with this recovery".

The governor also identified that when rates do eventually rise, that they would do so in a measured and intentionally slow manner, in order to minimise the financial risk that comes along with higher loan repayments.

 

"Raising bank rate gradually would guard against the risk that, after a prolonged period of exceptionally low interest rates, increases in Bank rate have a bigger impact than expected on output and spending", he said. 

Previously, the Bank of England attached the future of interest rates do the countryís unemployment rate, identifying that they would only begin to consider raising them from their historic low of 0.5% when unemployment fell below 7%.

This was originally believed to have happened by 2016; however the staggering economic performance of Britain in the latter stages of 2013 has meant that this threshold is set to be breached as early as spring this year. 

The reality of this has led to many economists to call for interest rates to be raised now, but Mr Carney has warned that the countryís economy is not stable or sustainable enough at this time to be able to cope with the increased financial demands that a rate rise would incur.

Mr Carney cited that the Bank would wait until labour productivity and output improved in the country before reassessing the situation

The news will likely be positively received by the small businesses of the country, which have looked to capitalise on low interest rates in recent times and are in dire need of bolstering if the country has any aspirations of improving productivity over the next five years.

The bank identified their awareness of this issue, with their inflation report arguing:  "The Bank rate may need to remain at low levels for some time to come".

Katja Hall, chief policy director of the CBI business group, praised the Bank for their unwavering stance on rate rises despite intense pressure, arguing that is a positive move for improving the state of businesses across the UK.

"Forward guidance has clearly been effective in influencing companies' expectations of when interest rates will rise and in cementing their confidence in the recovery," she argued.

"The Bank's new guidance will give businesses further peace of mind that interest rates will stay low for some time, until investment and incomes are growing at sustainable rates."

New parameters

Mr Carney identified that the Bank would not be using a variety of parameters to gauge when the right time to implement a rate rise is, arguing that this is the best method to ensure that rates are risen in a responsible and positive manner.

Actual wages, labour productivity and GDP are all indicators that were given by the governor when discussing interest rates, and it thought that hopefuls of an interest rate rise will have to now wait till at least next year before they begin to creep up again. 

"On the basis of the economy following the Bank's expected path, the first rate increase is now pencilled in for the spring of 2015," said Chris Williamson, chief economist at Markit.

"Rates are then projected to rise to 2% by early 2017. Beyond 2017, the message from the Bank is that 'even when the economy has returned to normal... the appropriate level of Bank rate is likely to be materially below the 5% level set on average by the bank prior to the crisis'".

Caution

Mr Carney explained the banks cautious stance by arguing that the current nature of the countryís economic recovery is ëneither balance nor sustainableí, and as such more work needs to be done on improving labour producitivty levels before it would be in everybodyís best interests to instigate a rate rise. 

"Households are saving less and spending more and business investment is likely to gather pace this year," he said.

"A few quarters of above trend growth driven by household spending are a good start but they aren't sufficient for sustained momentum," he said.

He did however forecast a substantially high trajectory for the British economy this year, estimating it to grow by a monumental 3.4% this year alone.