The governor of the Bank of England, Mark Carney, has announced that he will rethink his forward guidance policy on interest rates just six months after it was first put in place.
The Bank’s hand has been forced by a sharper than expected drop in the unemployment rate, which currently stands at 7.1%.
Mr Carney said in August that he would only consider increasing interest rates once unemployment had fallen to 7%, which was expected to not be until 2016.
Some experts think that the decline in real wage rates will play a part in the new guidance. Having said this, Chris Williamson, chief economist at Markit, said:
“It seems more likely that the bank will instead shift the focus to a broader range of indicators, including wage growth, as determinants of future interest rates,”
Critics have said that introducing more factors into the forward guidance might make it too difficult to give a clear and straightforward message.
Dame DeAnne Julius, former member of the Bank of England’s Monetary Policy Committee, told the BBC:
“Now that the recovery is pretty firmly established, they need to begin giving the signal at some point that interest rates will begin to rise, hopefully slowly, towards a more normal level,” she added.