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08

Carney defends BoE interest rate policy

Open-access content 29th August 2013

The governor of the Bank of England has reiterated that interest rates will not rise too soon despite criticism of his plan to keep rates low until unemployment falls below 7%.

In his first speech since taking up the post in June, Mark Carney said yesterday that the decision to provide 'forward guidance' that rates won't rise until unemployment fell below 7% was intended to provide 'certainty'.

The rate is currently 7.8%, but Carney said that even when the unemployment level falls to below 7%, increases in the base rate, which is currently a historical low of 0.5%, would not automatically follow.

'The 7% threshold is a staging post to assess the economy. Nobody should assume that it is a trigger for raising rates,' he said.

Carney's speech comes after the release of the guidance earlier this month. Following the publication, some actuaries warned that the Bank of England's decision to hold down interest rates until the labour market picks up would keep up the pressure on UK defined benefit pension scheme liabilities.

However, Carney said the forward advice 'provides you with certainty that interest rates will not rise too soon'.

He added: 'Exactly how long they stay low will depend on the progress of the recovery and in particular how quickly unemployment comes down. What matters is that rates won't go up until jobs and incomes are really growing. 'The knowledge that interest rates will stay low until the recovery is well established should give greater confidence to households to spend responsibly and businesses to invest wisely.'

Carney said he had 'tremendous sympathy' for savers, including those putting money aside for pensions, who would be affected by the lower rates.

However, 'raising interest rates now is not the answer', he insisted. 'Instead what savers need is a stronger economy. That will mean higher asset prices, and will allow interest rates to return to normal levels in a sustainable way.

'A strong economy is in all of our interests, as it will deliver better job prospects for our friends, neighbours, children and grandchildren.'

This article appeared in our August 2013 issue of The Actuary.
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