Bank of England pegs rates to jobs in new policy

The Bank of England overhauled its policy strategy yesterday, saying it planned to keep interest rates at a record low until unemployment falls to 7 per cent or below, something unlikely for another three years.

Barely a month after Canadian Mark Carney took over as governor, the central bank said it would keep interest rates at 0.5 per cent unless inflation threatened to get out of control or there was a danger to financial stability.

Carney said a recovery in Britain's fragile economy was under way and that it appeared to be broadening but he warned that it had a long way to go before it was on solid ground.

"This remains the slowest recovery in output on record," he told his first news conference since taking over at the bank. "We're not at escape velocity right now."

The British pound rallied after an initial fall on the announcement and British government bond prices were lower as the BOE's commitment on interest rates fell short of some expectations of a more aggressive plan to revive growth.

"It looks like rates are not going to rise in the next three years, though they could, as Carney has stressed they are not pre-committed, so again this is a rather valueless bit of 'forward guidance' as is the case with the ECB," said Mark Ostwald at Monument Securities.

The Bank of England followed the US Federal Reserve's approach by setting an unemployment target rather than committing to keeping rates low for a set period of time but included get-out clauses. BOE 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.