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BoE's Carney pushed to explain assumption at heart of low-rate policy
February 21, 2017 / 11:00 AM / in 9 months

BoE's Carney pushed to explain assumption at heart of low-rate policy

LONDON, Feb 21 (Reuters) - Bank of England Governor Mark Carney was challenged by lawmakers on Tuesday over the central bank’s decision to alter a fundamental assumption that helps it to justify keeping interest rates at a record low.

The BoE said earlier this month it believed Britain’s unemployment rate could fall to 4.5 percent - down from a previous estimate of 5 percent - before it starts to push up inflation.

That could help the central bank to keep rates low for longer, despite the resilience of Britain’s economy so far to the decision by voters last year to leave the European Union.

Britain’s unemployment rate currently stands at 4.8 percent.

Andrew Tyrie, the head of a panel of lawmakers who monitor the BoE, pressed Carney to explain the change during a regular question-and-answer session in parliament.

“This matters a lot because the Bank of England can allow forecast growth to rise without inflationary consequences once you’ve lowered this number,” Tyrie said. “And indeed that seems to be a crucial ingredient for your making of assumptions on whether to raise interest rates.”

Carney said the decision to lower the so-called equilibrium unemployment rate estimate was the result of an annual review and that some members of the Bank’s Monetary Policy Committee had felt for years that it was too high.

One MPC member, Ian McCafferty, told the lawmakers that he believed the rate stood at 4.75 percent, slightly higher than the consensus view of the nine-member committee.

Earlier this month, fellow rate setter Kristin Forbes also said she believed the rate was not as low at 4.5 percent, and that there could soon be a case to raise interest rates.

Market interest rates rose earlier this year as Britain’s economy continued to grow strongly after the Brexit vote shock and speculation mounted that the BoE might raise rates.

The BoE dampened down that speculation this month when signalled it was in no hurry to raise rates, in part due to its view on the lower equilibrium interest rate. (Reporting by David Milliken, writing by William Schomberg, editing by Andy Bruce)

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