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  1. ITV Report

Interest rates: Is forward guidance as we know it dead?

Bank of England Governor Mark Carney. Photo: ITV News

Is forward guidance as we know it dead? The Governor of the Bank of England has just unveiled an update to his flagship policy and the certainty he was trying to give borrowers by tying an increase in interest rates to unemployment has gone.

The Bank now forecasts unemployment to breach the 7 per cent threshold around now.

Back in August it expected them to stay above that level until 2016.

So rates could go up any time - but will they?

The message from the Bank today has three parts:

  • Rates won't go up yet because there is still plenty of spare capacity in the economy

Companies could be producing more and hiring more people to do it without wages and inflation rising.

  • When they do come the rises in rates will be gradual

The Bank points to expectations in the markets of where rates will be and suggests they could be right.

Markets currently expect the first rise next Spring, rising to two per cent in 2017. If this happens, says the Bank, it thinks inflation will still be below its target so it implies it would be comfortable with rates at that level.

  • Over time, it thinks rates will settle at a lower level than was normal before the crash of 2007/8

The average then was 5 per cent. The Bank recognises market expectations of 2-3 per cent "for some while" and beyond 2017 and agrees rates may stay low.

The Bank of England said interest rates will remain on hold until the economy recovers further. Credit: PA Wire

This is still forward guidance an attempt to instill confidence in borrowers that rates won't go up soon - but is it easy to understand? You decide.

The Bank has been wrong before - its forecasts on unemployment were way off the mark.

Plenty of economists are beginning to argue for rate rises sooner than in today's report.

Making a decision based on Mark Carney's new guidance will be tricky.