BoE's Mark Carney to Keep Record Low Rate Until Unemployment Drops Below 7%

Bank of England Governor Mark Carney made a landmark moment in British monetary policy history after delivering explicit forward guidance that the key interest rate will stay at its record-low until the UK unemployment rate falls below 7%.

Launching the BoE's quarterly Inflation Report, Carney also said the central bank is ready to pump more stimulus into the economy through its £375bn (€433bn, $577bn) asset purchasing quantitative easing programme, which will also be subject to the unemployment guidance level.

The BoE said that UK GDP will reach its pre-crisis peak by the end of 2014 alongside Carney pointing to high unemployment as evidence that there is a big margin of spare capacity in the economy.

"It is now more important than ever for the monetary policy committee to be clear and transparent about how it will set monetary policy in order to avoid an unwarranted tightening in interest rate expectations as the recovery gathers strength," said Carney at a press conference.

UK Chancellor George Osborne said he welcomed Carney's announcement.

"Given the exceptional economic challenges continuing to face the UK economy, I agree with you that forward guidance can play a useful role in enhancing the effectiveness of monetary policy and thereby supporting the recovery," Osborne wrote in a letter to Carney.

Forward Guidance

Carney's forward guidance, a widely anticipated policy tool from a man who deployed it in his previous role as Bank of Canada governor, is subject to three "knockouts" which would void it.

The link between asset purchases and interest rates, and the unemployment rate would be broken if, firstly, the Monetary Policy Committee (MPC) thought CPI inflation would be 0.5% above the 2% target 18-24 months ahead.

Secondly, that medium-term inflation expectations "no longer remain sufficiently well anchored" and, thirdly, the Financial Policy Committee (FPC) thought such a stance threatened the country's financial stability.

Carney said that a "renewed recovery is now underway in the United Kingdom and it appears to be broadening."

In the second quarter, UK GDP growth accelerated to 0.6%, after a 0.3% expansion in the opening three months.

Private industry data from the service, construction and manufacturing sectors at the beginning of the third quarter suggest the pace of growth has quickened further. Activity in the service sector, which accounts for around three quarters of GDP, hit a six-and-a-half year high in July.

All eyes will now be on the unemployment rate in the UK, which official figures say was 7.8% in the three months to May. In order for this to be brought down to Carney's forward guidance threshold, around 750,000 new jobs need to be created in the UK economy. CPI inflation was 2.9% in June.