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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I'll vote against bombing Isis - but my conscience is far from clear

Chi Onwurah lays out why she'll be voting against British airstrikes in Syria.

I have spent much of the weekend considering how I will vote on the question of whether the UK should extend airstrikes against Daesh/Isis from Iraq to Syria, seeking out and weighing the evidence and the risks.

My constituents have written, emailed, tweeted, facebooked or stopped me in the street to share their thoughts. Most recognised what a difficult and complex decision it is. When I was selected to be the Labour candidate for Newcastle Central I was asked what I thought would be the hardest part of being an MP.

I said it would be this.

I am not a pacifist, I believe our country is worth defending and our values worth fighting for. But the decision to send British Armed Forces into action is, rightly, a heavy responsibility.

For me it comes down to two key questions. The security of British citizens, and the avoidance of civilian casualties. These are separate operational and moral questions but they are linked in that it is civilian casualties which help fuel the Daesh ideology that we cannot respect and value the lives of those who do not believe as we do. There is also the important question of solidarity with the French in the wake of their grievous and devastating loss; I shall come to that later.

I listened very carefully to the Prime Minister as he set out the case for airstrikes on Thursday and I share his view that Daesh represents a real threat to UK citizens. However he did not convince me that UK airstrikes at this time would materially reduce that threat. The Prime Minister was clear that Daesh cannot be defeated from the air. The situation in Syria is complex and factionalised, with many state and non-state actors who may be enemies of our enemy and yet not our friend. The Prime Minister claimed there were 70,000 ground troops in the moderate Free Syrian Army but many experts dispute that number and the evidence does not convince me that they are in a position to lead an effective ground campaign. Bombs alone will not prevent Daesh obtaining money, arms and more recruits or launching attacks on the UK. The Prime Minister did not set out how we would do that, his was not a plan for security and peace in Syria with airstrikes a necessary support to it, but a plan to bomb Syria, with peace and security cited in support of it. That is not good enough for me.

Daesh are using civilian population as human shields. Syrians in exile speak of the impossibility of targeting the terrorists without hitting innocent bystanders. I fear that bombing Raqqa to eliminate Daesh may be like bombing Gaza to eliminate Hamas – hugely costly in terms of the civilian population and ultimately ineffectual.

Yet the evil that Daesh perpetrate demands a response. President Hollande has called on us to join with French forces. I lived in Paris for three years, I spent time in just about every location that was attacked two weeks ago, I have many friends living in Paris now, I believe the French are our friends and allies and we should stand and act in solidarity with them, and all those who have suffered in Mali, Kenya, Nigeria, Lebanon, Tunisia and around the world.

But there are other ways to act as well as airstrikes. Britain is the only G7 country to meet its international development commitments, we are already one of the biggest humanitarian contributors to stemming the Syrian crisis, we can do more not only in terms of supporting refugees but helping those still in Syria, whether living in fear of Daesh or Assad. We can show the world that our response is to build rather than bomb. The Prime Minister argues that without taking part in the bombing we will not have a place at the table for the reconstruction. I would think our allies would be reluctant to overlook our financial commitment.

We can also do more to cut off Daesh funding, targeting their oil wells, their revenues, their customers and their suppliers. This may not be as immediately satisfying as bombing the terrorists but it is a more effective means of strangling them.

The vast majority of the constituents who contacted me were against airstrikes. I agree with them for the reasons I set out above. I should say that I have had no experience of bullying or attempts at intimidation in reaching this decision, Newcastle Central is too friendly, frank, comradely and Geordie a constituency for that. But some have suggested that I should vote against airstrikes to ensure a “clear conscience” ’. This is not the case. There will be more killings and innocent deaths whether there are UK airstrikes or not, and we will all bear a portion of responsibility for them.

A version of this article was originally sent to Chi Onwurah's constituents, and can be read here