Bank is in no hurry to raise rates

Sterling briefly fell against the dollar yesterday, as the minutes emphasised that an eventual fall in unemployment to seven per cent would not lead to an automatic tightening of monetary policy.

The minutes also showed policymakers were unfazed by a recent increase in inflation expectations – which officials have previously linked to hikes in power tariffs.

However, the Bank did see various risks to what it called Britain’s current “sustained recovery”, the rationale for keeping “easy” policy. Governor Mark Carney linked the Bank’s interest rates to a recovery in the labour market in August. Since then, unemployment has fallen faster than the Bank expected, touching 7.6 per cent in the three months to September.

Last week, when the Bank announced upbeat growth estimates and said unemployment could hit seven per cent as soon as late 2014, Mr Carney stressed that level should not be seen as a trigger for a rate hike.

The minutes of the November meeting of the Bank’s Monetary Policy Committee suggested the other eight MPC members agreed.

“With the proviso that medium-term inflation expectations remain sufficiently well-anchored, the projections for growth and inflation under constant bank rate underlined that there could be a case for not raising bank rate immediately when the seven per cent unemployment threshold was reached,” the minutes said.

George Buckley, an economist with Deutsche Bank, said the wording was a little more explicit than previous comments from Bank officials, that a fall in unemployment to seven per cent would not mean an automatic rate hike.

Jonathan Loynes, at Capital Economics, said the “main message” of the minutes was to play down the importance of the unemployment rate threshold.

“Provided inflation pressures stay subdued, as we expect, interest rates are going nowhere for a long time yet, even if the economy continues to grow strongly,” he said.

Analysts said the Bank was echoing a message from the US Federal Reserve. Its outgoing chairman, Ben Bernanke, said on Tuesday that US interest rates could remain near zero until “well after” unemployment falls under the Fed’s unemployment threshold.

As expected, the Bank minutes showed the nine members of the Monetary Policy Committee voted unanimously to leave interest rates at 0.5 per cent – where they have been since March 2009 – and not to add to the £375bn of bond purchases conducted between then and October 2012.

The MPC members saw no signs that any of the ‘knockout’ clauses – which could void the forward guidance policy – had been breached. The knockouts look at inflation expectations and other risks to the economy.

In its quarterly Inflation Report last week, the Bank emphasised that higher interest rates would hinge on various factors such as labour market productivity. The minutes showed MPC members still had “a range of views” about the outlook for productivity but generally thought it would pick up.

Howard Archer, the chief UK and European Economist at IHS Global Insight, said: “The minutes support the view that the Bank remains in no hurry whatsoever to raise interest rates.

“As such, the minutes may slightly dilute market expectations that the Bank of England will start raising interest rates early in 2015, or even in late 2014. The Bank of England is stressing that significant growth headwinds persist, there is still a lot of slack in the economy and conditions are yet to fully normalise.

“It is clear that the Bank of England wants to give the economy every chance to develop sustainable decent growth and not to risk choking it off by any premature increasing of interest rates.”