In its quarterly inflation report, the Bank unveiled plans to tie interest rates to the unemployment rate, but added its new ‘forward guidance’ to the market is not unconditional.
The 7% mark represents the point at which the BoE will “reassess” its interest rate policy, governor Mark Carney said this morning. UK unemployment currently rests at 7.8%.
Carney said guidance was also dependent on inflation remaining within 0.5 percentage points of the 2% target on a two-year horizon.
The governor added investors’ rate expectations are still out of sync with the Bank’s own.
“The path of market interest rates implies faster withdrawal of monetary stimulus than appears likely given current output,” he said in a press conference this morning, echoing comments made by the BoE earlier this summer.
The Bank’s median forecast for unemployment in two years’ time is currently 7.3%, according to today’s inflation report, but Carney said longer-term forecasts are still uncertain.
Jonathan Harris, director of mortgage broker Anderson Harris, said: “While the Bank is not promising to keep interest rates low for a particular period of time, it expects that rates will not rise above their current level of 0.5% before the third quarter of 2016. This is far more certainty than we have ever had and while it brings no comfort to savers, it will reassure overstretched borrowers who are worried about potential rate rises.
Harris said he expects fixed rates to tumble further on this news.
“They may already be at historic lows but if lenders are to convince borrowers to opt for a fix when interest rates are highly unlikely to rise, then pricing needs to be attractive.”
