Bank of England Governor Mark Carney has updated his forward guidance policy to include a wider range of indicators for raising interest rates rather than just the rate of unemployment.
Now that the jobless rate has fallen much faster than foreseen when the guidance was published last August, Mr Carney has added wages, productivity, and spare capacity within the economy to the list in order to help make “more nuanced judgements”.
The new guidance indicates that a rate rise should not be expected before the second quarter of 2015 and that only gradual rises thereafter would mean a level of around 2 per cent would be reached in three years’ time.
When interest rates finally do start to rise, Mr Carney indicated that they would likely be “materially below” the average 5 per cent seen before the financial crisis. He added that quantitative easing will remain at £375bn until a rate rise.
Furthermore, the Bank has said it now expects the economy to grow by 3.4 per cent this year, compared with its 2.8 per cent forecast in November, along with a prediction for an 11.5 per cent increase in business investment and a 23 per cent rise in investment in house building. Forecasts for 2015 are also higher than expected three months ago, with 2.7 per cent growth expected compared with November’s 2.3 per cent prediction.
Despite the upgrade to the Bank’s forecasts, Mr Carney warned that the recovery so far was neither balanced nor sustainable and stressed that business investment needs to take over from household spending as a driver of growth this year.
The Governor also warned that the current storms across the UK could pose a significant threat to the economy, saying that transport, other businesses and agriculture will be affected for some time.