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Carney softens bank rules and defends jobless link to rates
by Chris Marshall on Aug 28, 2013 at 13:45
Unemployment could take ‘even longer than three years’ to reach the new threshold set by the Bank of England for future interest rate hikes, governor Mark Carney has said.
In an attempt to win round sceptical markets to the Bank's new strategy of ‘forward guidance’, Carney urged Brits not to expect a quick lift in interest rates, or a fast rise in the numbers returning to work.
In a double-pronged assault, Carney (pictured) also outlined new measures to allow banks to increase their lending, reducing the amount of highly liquid assets such as government bonds that they must hold once they meet the previously agreed 7% capital threshold.
The resultant £90 billion reduction in the required holdings between the UK’s eight major banks and building societies would help increase lending to business and consumers and support the ‘fledgling recovery’, Carney said in his speech delivered in Nottingham.
Jobs are no 'trigger'
Speaking to businesspeople, Carney mounted a robust defence of the Bank’s new strategy of linking the first increase in the base rate from a historic low of 0.5% to a fall in unemployment from 7.8% to 7%.
Contrary to Carney’s guidance, amid improving reports on the UK economy, markets have been pricing in a rates rise in mid-2015. At the same time the pound has unexpectedly increased in value.
But Carney used one of his first public appearances since joining the Bank of England in July to remind investors that ‘nobody should assume’ that the 7% unemployment target is a ‘trigger’ for raising rates, but would rather be a 'staging post' for ending rock-bottom rates.
He also attributed much of the market response following his announcement of forward guidance earlier this month to external forces, particularly speculation that the US Federal Reserve will soon reduce the pace of its asset purchases.
‘Movements in longer-term market interest rates are certainly relevant, but what matters most to you is what actually happens to Bank Rate, now and in the future,’ he said.
On the defensive
In his speech, Carney attempted to see off criticism about the impact of the Bank’s policy on already above-target inflation: ‘Let me reassure you that our mandate to deliver price stability has not changed,’ he said. ‘I certainly have no hesitation in raising interest rates when required.’
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