The Bank of England has updated its forward guidance policy (12 February 2014) in the light of the December unemployment figures, which showed a sharp drop to 7.1% - just short of 7% unemployment threshold set n August. Despite the unexpected fall in the unemployment figures, the Bank estimates that there is still sufficient slack in the economy to keep interest rates at 0.5%.
More good news for the Chancellor and Governor of the Bank of England this week as the downward trend in inflation continued. November’s Consumer Price Index (CPI) grew by 2.1% in the year to November, down from 2.2% in October – just 0.1% off target.
So at long last its official – the Bank of England’s ‘forward guidance’ policy is now in the public domain meaning that UK base rates are as good as fixed at 0.5% for the foreseeable future, assuming unemployment does not fall to 7%, which remains highly unlikely in the medium term. Although the ‘gap’ between the current unemployment rate of 7.8% and the likely automatic intervention rate of 7% seems relatively small beer, the last four years have seen unemployment remain stuck between 7.8% and 8.4%, and the last time unemployment was below 7% was back in the first quarter of 2009.