As it turns out, BOE Governor Mark Carney‘s debut a few months ago was just the tip of the iceberg. At that time, Carney had adopted forward guidance and basically told the markets, “Hey, don’t expect a rate hike over the next few years.”
After that, Carney kept the markets at the edge of their seats, as he hinted of “big changes” ahead for the central bank. As expected, he revealed some of those changes in yesterday’s Inflation Report.
1. Interest rate linked to jobless rate
It looks as though the BOE is following the Federal Reserve’s strategy, as Carney announced the BOE’s 7.0%% unemployment threshold. This means that, as long as the jobless rate remains above 7.0%, the central bank would NOT be raising interest rates.
As it is, the unemployment rate stands at 7.8%, and based on the BOE’s latest forecasts, the central bank believes that unemployment will remain above its 7.0% target until Q3 2016. This puts a rate hike way past what many market pundits were expecting.
Doing a little napkin math reveals that the U.K. economy would need to pump in 750,000 more jobs before the BOE can even consider raising the benchmark rate, which is currently sitting pretty at an all-time low of 0.50%.
Furthermore, Carney also hinted at the possibility of additional QE measures (a.k.a. more bond purchases) should unemployment remain above 7.0%.
2. Impact of inflation and financial stability on policy
Aside from linking interest rate changes to the unemployment rate, the BOE mentioned that inflation and financial stability in the United Kingdom would also have a say in future monetary policy.
Carney specified three additional conditions under which further stimulus could be warranted:The first scenario is when the monetary policy committee predicts that inflation is likely to stay above 2.5% in the next 18 to 24 months.
The second scenario is when inflation expectations for the medium-term are not very stable, and the third is when the Financial Policy Committee declares that the ultra-easy monetary policy is already posing a significant threat to financial stability.
3. Upbeat growth forecasts
On a lighter note, the BOE recognized the recent improvements in the U.K. economy as it revised its growth forecasts higher. The central bank expects the economy to expand by 1.5% this year, up from the 1.2% growth estimate a few months back. In addition, they upgraded their 2014 GDP forecast from 1.9% to 2.7%.
These upbeat growth forecasts suggest that BOE Governor Carney and his men are hopeful that their easing efforts will translate to higher GDP figures sooner or later.
If that’s the case, the U.K. economy might be able to achieve the BOE’s jobless rate target in a shorter span of time and see the start of tighter monetary policy.