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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Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.