LONDON: Bank of England Governor Mark Carney will try on Wednesday to come up with a more credible commitment to keeping interest rates at a record low, after the Bank's previous guidance was overtaken by a plunge in British unemployment.
In August, shortly after arriving from his native Canada, Carney persuaded the other eight the Bank policymakers to make an unprecedented pledge to keep rates on hold until unemployment fell to 7 percent. The Bank said that would take three years.
Barely six months later, unemployment stands at 7.1 percent. And pressure is growing on the Bank to overhaul its so-called forward guidance policy when it publishes quarterly economic forecasts at 1030 GMT.
Britain's economy has grown at an annualised rate of 3 percent since August. But output is still 2 percent below its 2008 peak, unlike many other advanced economies, which have more than made up the damage caused by the financial crisis.
The Bank says a lot of room remains for more growth without stoking inflation, despite a record number of people in work and business surveys that show bottlenecks in factories.
Two weeks ago, after the latest fall in the unemployment rate, Carney stressed the economic recovery had some way to run before it would be time to start raising rates from their current 0.5 percent. He also said any rise would be gradual.
A former Bank deputy governor said Carney needed to translate that message into something more formal to avoid market speculation that a rate rise may be imminent. And he needs to bring the rest of the BoE's Monetary Policy Committee with him.
"The case for guidance is stronger than ever," John Gieve told economists on Tuesday. "The risk of the markets getting the wrong end of the stick is great, and we know from past form that sterling is very sensitive to changes in sentiment."
Sterling hit a five-year high on a trade-weighted basis last month - something the Bank fears could impede British exports - in part because of expectations that Britain will raise interest rates before the United States or the euro zone.
New Federal Reserve Chair Janet Yellen said on Tuesday that the she intended to reduce the stimulus that the U.S. central bank is pumping into the U.S. economy, but the recovery in the country's labour market was far from complete.
Economists polled by Reuters do not expect the Bank to raise rates until the second quarter of 2015. But financial markets see a move within 12 months, possibly as soon as late 2014.
GUIDANCE CHANGE UNCLEAR
How the Bank will recast its forward guidance is not clear. Carney has said the central bank will look at a wider range of indicators. That could mean wage inflation and measures of how many extra hours Britons would like to work.
Other options include committing to leave interest rates on hold for a specific time - something Carney tried at Canada's central bank - lowering the jobless rate threshold or publishing estimates by members of the Monetary Policy Committee on when rates will rise.
Economists also expect the Bank to lower its inflation forecasts - reflecting sterling's strength and an unexpectedly rapid return of inflation to its 2 percent target - and to leave its growth forecasts little changed.
However, Gieve said Carney may face a backlash from MPC members who do not want to be pinned down while much uncertainty remains about how much damage Britain's economy suffered from the 2008 financial crisis.
Only one MPC member, Martin Weale, voted against forward guidance in August, but others were sceptical about some forms of it before Carney's appointment.- Reuters
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