In his first speech since taking the helm at the Bank of England, Mark Carney said he expects a decline in the unemployment rate to take some time.
The Bank of England announced forward guidance when it delivered its inflation report earlier this month.
At the time Carney said forward guidance is based on 2.5% consumer prices and 7% unemployment rate. The unemployment rate is currently at 7.8%.
The monetary policy committee (MPC) committed to maintaining its bank rate at 0.5% until unemployment rate fell to a threshold of 7%. While delivering the inflation report, Carney added that until that threshold is reached the MPC would not reduce its asset purchases, subject to price and financial stability.
In today’s speech he said there are three key reasons it could take some time for the unemployment rate to fall to 7%.
“First, while the outlook for growth has improved considerably in recent months, growth prospects over the next three years are solid not stellar. The MPC’s current forecast is for growth to average around 21⁄2% per year over the next three years, just below its historical average rate of 23⁄4%. That suggests spare capacity will be used up only gradually.
“Second, a great many jobs need to be created to bring unemployment down. A fall in unemployment from its current level to 7% over three years would mean well over three quarters of a million new jobs created — and given the shrinkage in the public sector, over a million new jobs in the private sector.
“Third, a recovery in growth does not necessarily mean faster job creation and lower unemployment.”
He also said he is willing to increase stimulus if expectations of higher bank rates begin to impact the economic recovery.
In today’s speech delivered in the East Midlands he reiterated that idea:
“Three weeks ago the Monetary Policy Committee (MPC) did something it has never done before: we gave clear, quantitative guidance about the future path of monetary policy. Specifically, we announced that we do not intend to raise Bank Rate at least until the unemployment rate falls to 7%, provided there are no material threats to either price or financial stability.1 All nine MPC members agreed to set monetary policy in future according to this framework of forward guidance.
“That does not mean Bank Rate will automatically rise when unemployment falls to 7%. Nor is 7% a target for the unemployment rate — it should ultimately fall well below that level. Before the Great Recession, the UK’s unemployment rate stood at just over 5%. The 7% threshold is instead a staging post along the road to recovery. When unemployment reaches 7% the MPC will reassess the state of the economy and the appropriate stance of monetary policy….
“The upward move in market expectations of where Bank Rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy. The MPC will be watching those conditions closely. If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further. Our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more.”