Borrowers Boost: Interest Rates Tied To Jobs

The Bank of England plans to keep the base rate of interest at its record low level until unemployment falls to 7% - unlikely for another three years.

The announcement was made by new governor, Mark Carney, at his first Inflation Report news conference where he outlined sweeping changes to monetary policy in a bid to provide more clarity to the public and financial markets.

The bank said it would keep the base rate at 0.5% unless inflation threatened to spiral out of control or there was a danger to financial stability.

Policymakers said they stood ready to buy more government bonds if additional stimulus was needed and would not reverse existing purchases while unemployment was too high.

It meant there would be no scaling back on the bank's £375bn programme of quantitative easing (QE) for at least three years.

Mr Carney said unemployment falling to 7% would mean more than 750,000 UK jobs are created, which, combined with rising wages, would represent "real improvements in the lives of people across the nation".

But the Bank suggested that growth was likely to be "weak by historical standards", even though economic recovery was "taking hold."

Inflation, the report said, was forecast to stay above its 2% target until the second half of 2015 based on market rate expectations though it was now not expected to rise above 3% this year.

The forward guidance on the likely movement of bank rate - while welcome news for borrowers - means savers face more years of weak interest on their money.

A growing number of major central banks, including the US Federal Reserve, are providing so-called forward guidance to help nurse their economies back to health.

The BoE also forecast that the economy would grow by 0.6% during the current quarter - the same as between April and June, and that growth would reach an annual rate of 2.6% in two years' time.

The Chancellor welcomed the introduction of forward guidance by the Bank in a letter to Mr Carney.

George Osborne said: "Given the exceptional economic challenges continuing to face the UK economy, I agree with you that forward guidance can play a useful role in enhancing the effectiveness of monetary policy and thereby supporting the recovery."

Vicky Redwood, chief UK economist at consultancy Capital Economics, said the Bank's guidance was a "clear steer that interest rates will stay on hold until the end of 2016 or even 2017.

"Although financial markets already expected rates to stay low for a long time, this probably exceeds their expectations," she added.

But the Bank's interest rate pledge did little to boost market confidence as the FTSE 100 Index fell as much as 1% after the announcement, although the pound gained some strength.