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Will Carney rethink 7% unemployment target as recovery takes hold in UK?

January 25, 2014

Mark Carney's Flagship policy linking interest rates to unemployment rate of 7 percent could be set aside, less than six months after it was announced as the British economy is seen in a different place from that of last summer. Data released last week, showed UK unemployment had fallen much faster than the Bank expected. Unemployment rate has taken another shock dive to 7.1 percent in November down from 7.4 percent in October, and now stands just a 0.1percent above the central bank's target for considering an interest rate rise. The Bank of England followed the Federal Reserve in announcing forward guidance last August in a bid to make monetary policy more effective, saying the bank would not consider a rate hike at least until unemployment fell to 7 percent. Carney in Davos 2014: Falling Unemployment Doesn't Mean Rates Will Rise Speaking at the World Economic Forum in Davos , Carney made it clear that there was "no immediate need to increase interest rates" even as unemployment nudges closer to the threshold, citing that policymakers look at overall conditions in the whole labour market rather than just one indicator. Chancellor of the Exchequer George Osborne backed Carney when asked about guidance, where he stressed that unemployment is falling because of BoE and government policy and that this is a mark of success. Carney's message echoed those of other senior Bank figures over the past two days. Officials appear in no hurry to tighten policy! Paul Fisher , the Bank's executive director for markets, said that although unemployment had tumbled in November, the Bank would still risk the economic recovery if it raised rates too soon. Fisher added the Bank may provide further forward guidance when unemployment rate reaches the 7 percent threshold, while he said that recent return of inflation to its 2 percent target, gave the Bank room to wait before increasing rates. Also, Ian McCafferty , one of four rate-setters signaled policymakers are content to keep rates low to nurture a speedier recovery as long as UK inflation remains subdued. In fact, it could be inflation that now keeps the base rate low. Consumer prices inflation fell to a surprise 2 percent in December for the first time in more than four years. Contents of the bank's minutes, also released last week at the same time as the unemployment figures, showed officials agreed it would not be right to raise rates as soon as the unemployment rate falls to 7 percent. IMF endorses Carney policy, upgrades UK Earlier last week, the International Monetary Fund raised its forecast for 2014 growth to 2.4 percent from 1.9 percent, the biggest upward revision for any advanced economy, in a fresh boost for George Osborne . However, Carney played down the importance of the increased growth forecast from the International Monetary Fund , pointing out that "it`s coming off a low base" and the economy had still not recovered to its 2008 levels.


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Source: ICN.com Financial Markets


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