LONDON (Reuters) - Bank of England policymakers will be in no hurry to raise interest rates even as the economy gathers steam, minutes of their latest policy meeting showed on Wednesday.
Sterling briefly fell against the dollar and British government bond prices pared losses as the BoE underscored its message that an eventual fall in unemployment to 7 percent would not lead to an automatic tightening of monetary policy.
The minutes also showed policymakers were unfazed by a recent increase in inflation expectations - which officials have previously linked to hikes in power tariffs.
But the Bank did see various risks to what it called Britain’s current “sustained recovery”, the rationale for keeping easy policy.
Governor Mark Carney linked the BoE’s interest rates to a recovery in the labour market in August. Since then unemployment has fallen faster than the BoE expected, touching 7.6 percent in the three months to September.
Last week, when the Bank announced upbeat growth estimates and said unemployment could hit 7 percent as soon as late 2014, Carney stressed that level should not be seen as a trigger for a rate hike.
The minutes of the Nov 6-7 meeting of the Bank’s Monetary Policy Committee suggested the other eight MPC members agreed.
“With the proviso that medium-term inflation expectations remain sufficiently well-anchored, the projections for growth and inflation under constant bank rate underlined that there could be a case for not raising bank rate immediately when the 7 percent unemployment threshold was reached,” the minutes said.
George Buckley, an economist with Deutsche Bank, said the wording was a little more explicit than previous comments from BoE officials that a fall in unemployment to 7 percent would not mean an automatic rate hike.
Jonathan Loynes at Capital Economics said the main message of the minutes was to play down the importance of the unemployment rate threshold.
“Provided inflation pressures stay subdued, as we expect, interest rates are going nowhere for a long time yet even if the economy continues to grow strongly,” he said.
The BoE’s attempts to stress it remains far from tightening monetary conditions are an echo of the message from the U.S. Federal Reserve. Its outgoing chairman, Ben Bernanke, said on Tuesday that U.S. interest rates could remain near zero until “well after” unemployment falls under the Fed’s unemployment threshold.
As expected, the BoE minutes showed the nine members of the Monetary Policy Committee voted unanimously to leave interest rates at 0.5 percent - where they have been since March 2009 - and not to add to the 375 billion pounds ($604 billion) of bond purchases conducted between then and October 2012.
The MPC members saw no signs that any of the ‘knockout’ clauses - which could void the forward guidance policy - had been breached. The knockouts look at inflation expectations and other risks to the economy.
In its quarterly Inflation Report last week, the BoE emphasised that higher interest rates would hinge on various factors such as labour market productivity. The minutes showed MPC members still had “a range of views” about the outlook for productivity but generally thought it would pick up.
$1 = 0.6210 British pounds