Britain Tightens Monetary Policy

By Scott Sumner Aug 7, 2013, 10:51 AM 

This was certainly disappointing:

LONDON (Reuters) – The Bank of England broke with tradition on Wednesday, saying it planned to keep interest rates at a record low until unemployment falls to 7 percent or below, which it views as unlikely for another three years.

But its attempt to steer expectations about future rate moves and bolster a fledgling economic recovery underwhelmed investors who brought forward expectations for when rates would rise from a record low – the opposite of what the central bank was hoping for.

Mark Carney, who took over as governor just over a month ago, said a recovery in Britain’s economy was underway and appeared to be broadening but had a long way to go.

.  .  .

Unemployment is expected to fall only slowly from its current level of 7.8 percent of the workforce, with the central bank expecting it to average 7.1 percent in the third quarter of 2016, the end of its forecast horizon.

This implies that the BoE expects to keep interest rates unchanged until at least that time, unless one of three conditions is breached before then.

But if the recent spurt of strong economic data persists, the jobless rate could fall significantly faster.

“The threshold target for unemployment was higher than the market was expecting and the market’s perception was that if the economy recovers then rates might rise sooner,” said Paul Robson, currency strategist at RBS, after sterling was propelled to a one-and-a-half-month high.

It’s not clear to me whether the BoE got bad advice, or if Carney simply didn’t have the votes.

On the plus side this probably doesn’t fully offset the recent easing at the BoE.

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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