Bank of England: interest rates stay low til unemployment drops

Mark Carney's Bank promises to fight the slack in the economy.

The Bank of England has released its quarterly inflation report, in which it assesses the state of inflation in the UK and lays out the risks ahead. August's release is particularly notable because it is the report in which the Bank promised to detail its plans for the role of forward guidance in British monetary policy.

Forward guidance is the practice of revealing the rules by which the Bank plans to make decisions about policy, and is important because much of the intricacy of monetary policy involves managing expectations. For instance, if investors expect interest rates to rise when growth gets high, they may be wary of making investments, which will itself keep growth low. Therefore, by promising that interest rates would stay low in the event of growth, a central bank can boost the economy without resorting to more conventional tools.

The inflation report reveals the forward guidance that the Bank has settled on. The key measure is unemployment. The Bank will not raise its base rate from 0.5 per cent "at least until the Labour Force Survey (LFS) headline measure of the unemployment rate had fallen to a ‘threshold’ of 7%". That is roughly equivalent to the Evans Rule (named after Chicago Fed President Charlie Evans) applied by the US Federal Reserve, which swears to keep the base rate under 0.25 per cent as long as unemployment remains above 6.5 per cent.

The Bank's rule contains a few conditions beyond the unemployment threshold, however. Firstly, it only holds if the MPC thinks inflation is "more likely than not" to be less than 0.5 percentage points above the 2 per cent target 18-24 months ahead; secondly, the Banks must feel that medium-term inflation expectations remain sufficiently well anchored; and thirdly, the Financial Policy Committee (FPC, a separate body, albeit one with three overlapping members) must be sure that the rule does not pose a threat to financial stability.

The MPC sums up the rationale for what will surely be known as the Carney Rule:

In essence, the MPC judges that, until the margin of slack within the economy has narrowed significantly, it will be appropriate to maintain the current exceptionally stimulative stance of monetary policy, provided that such an approach remains consistent with its primary objective of price stability and does not endanger financial stability.

The rule is extremely similar to the Evans Rule, but is a lighter touch: the unemployment threshold is higher, and the FPC oversight provides more opportunity for a "knockout" to be applied. Nonetheless, it is a radical change for UK monetary policy, since it represents the Bank of England claiming direct influence over the unemployment rate at the highest levels.

Politically, the rule takes some of the steam out of the Government's attempts to present the economy as on the mend. Setting an unemployment threshold of 7 per cent means that the Chancellor can no longer present the UK's labour market as healthy, and will hopefully draw attention to the fact that unemployment has stagnated closer to 8 than 7 per cent for the past six months. It also lessens the ability of the Government to focus on recent increases in growth; as the Bank points out, while unemployment is this high, there is almost certainly slack in the economy, meaning growth could be higher.

But accommodative monetary policy has to be accompanied by accommodative fiscal policy to be effective. There is much George Osborne could do to aid Mark Carney's attempts to fix the economy, but there is much else he could do to frustrate them. The burden is shared. Hopefully the Pushmi-pullyu can agree on what needs to be done.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Why I’m thinking of joining the Labour Party

There’s a lot to admire in the direction Jeremy Corbyn is taking the party – perhaps it’s time to get involved.

Why I'm leaving Labour”, as Owen Hatherley remarked a few days ago, appears to be the new “why I’m leaving London”. However, aside from a few high(ish) profile departures, the bigger story is the net increase in membership of 90,000 that Labour has enjoyed since Jeremy Corbyn became leader. Indeed, the last few weeks have got me seriously considering whether I should add to these impressive numbers and join the party myself.

For me, one of the most cheering pieces of news since Corbyn’s victory was the convening of an advisory committee to shadow chancellor John McDonnell, including policy and academic heavyweights such as Mariana Mazzucato, Ann Pettifor, Joseph Stiglitz and Thomas Piketty. It was a clear indication that some fresh and serious thought was going to be put into the creation of a plan for remaking and rejuvenating the British economy. The early signs are that Labour will be offering a dynamic, high-tech economy of the future, with good pay and job security at its heart, which will stand in sharp contrast to the miserable Randian dystopia George Osborne has been pushing the country into during his time at the Treasury.

Also refreshing has been Corbyn’s use of Prime Minister’s Questions to give a voice to those affected by austerity. Given that our media and political class is disproportionately populated by people from privileged backgrounds, it’s really important that an extra effort is made to ensure that we hear first-hand from those bearing the brunt of these policies. It’s right in principle, and it turns out to be good politics as well. Because apparently many Conservative MPs are too stupid to realise that responding to the concerns of working class people with loud, derisive braying merely provides the public with a neat and powerful illustration of whose side each party is on.

Corbyn has taken a lot of flak in the media, and from MPs on the Labour right, for his response to the Paris attacks. But as someone who researches, teaches and writes on British foreign policy, Middle East politics and security issues, my admiration for the Labour leader has only grown in recent days.  

In the atmosphere immediately after a terrorist atrocity, a discourse emerges where caring about the victims and being serious about dealing with the threat are taken to be synonymous with advocating military responses and clampdowns on civil liberties, irrespective of the fact that fourteen years of pursuing this approach under the “war on terror” has only served to make the problem far worse. At times like these it takes a great deal of courage to articulate a careful, cautious approach emphasising non-military forms of action that address root causes and whose effects may be less dramatic and immediate. Many people were simply not in the mood to hear this sort of thing from Corbyn, but his policies are objectively more likely to make us safer, and I admire him for not being intimidated into silence despite the gallons of vitriol that have been poured on him.

In general, on national security, there is something heavily gendered about the narrative that casts the alpha male Cameron keeping Britain safe versus the dithering milquetoast Corbyn who doesn't understand the harsh realities. We reached the nadir of this stone age machismo during the last election campaign when Very Serious Jeremy Paxman put it to Ed Miliband that he couldn’t have Vladimir Putin in a fight.  After the disasters of the last decade and a half, the time is right to articulate a more intelligent, sophisticated alternative to the expensive, counterproductive militarism of the Conservative Party and the Labour right wing.

The question of whether Corbyn can win an election is certainly one that preoccupies me. He will struggle to attract voters to his right just as Yvette Cooper, Andy Burnham or Liz Kendall would have struggled to win back votes Labour lost to the SNP and the Greens. Enthusing and rallying the perhaps 30 per cent of the electorate who are broadly on the left is one thing, but adding the other 6-7 per cent that you need to win an election is another challenge altogether. Corbyn and his team have been on a steep learning curve since their shock victory in September, and they urgently need to clarify their message and improve their media strategy. Almost all the corporate press are bound to remain hostile, but there are ways to provide them with as little ammunition as possible.

More importantly, Corbyn’s team need to find ways of connecting directly with the public and bring them actively into what he's trying to do. In the current anti-politics mood, an opposition party based on a genuine, engaged mass movement could be a formidable force. Initiatives like “Momentum” will need to make quick and substantial progress.

Fundamentally, Corbyn’s Labour has to do what everyone concerned with genuine social progress has had to do throughout history: articulate points of view that go against prevailing orthodoxy, and do so in as persuasive a way as possible. By definition, these are battles against the odds. But you can't win them if you don't fight them. And for me, and I think most people on Corbyn's part of the left, five years of austerity have taken us beyond the point where we can accept the least worst version of the status quo. That prospect has simply become too painful for too many people.

So will I join? I’m still unsure. Without doubt there will be times when the leadership needs constructive, even robust criticism, and as a writer and researcher I may feel more free to articulate that outside of the Labour tribe. But whatever choice I make, the point for me is that this isn’t really about Jeremy Corbyn so much as the wider movement he represents, demanding a real change of course on politics, economics and foreign policy. That collective effort is something I will certainly continue to play an active part in.

David Wearing researches UK-Saudi-Gulf relations at the School of Oriental and African Studies, where he teaches courses on Middle East politics and international political economy. He sits on the steering committee of Campaign Against Arms Trade.