LONDON — In a significant shift in strategy intended to spur Britain’s economic recovery, the Bank of England said Wednesday that it would aim to keep interest rates at a record low until the nation’s unemployment rate declines.
Under its new strategy, the Bank of England said it did not intend to increase interest rates, currently at 0.5 percent, until the unemployment rate fell to at least 7 percent, from the current level of 7.8 percent. The central bank also forecast that unemployment might not reach that level until at least the third quarter of 2016, suggesting that rates could remain unchanged for three more years.
By linking future rate decisions directly to the jobless rate, the Bank of England’s new governor, Mark J. Carney, broke with tradition and aligned the bank more closely with the Federal Reserve’s policy of providing more clarity about its intentions. Mario Draghi, the president of the European Central Bank, has also recently moved to reassure markets by saying the institution would not raise its benchmark interest rates for some time.
Short of pumping more money into economies that are still struggling to recover, central bankers in Europe have been seeking new ways to encourage banks to lend and to increase confidence among companies and consumers. Carney, who took over at the Bank of England last month, said linking interest-rate policy to unemployment was intended to reduce uncertainty.
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Peter Spencer, an economic adviser at Ernst & Young’s Item Club, an economic forecasting group, said the new strategy would be helpful because Britain’s “economy is in recovery rather than remission, and this guidance gives the bank the flexibility to reduce the risk of relapse.”
But some experts were more skeptical.
Colin Edwards, an economist at the Center for Economics and Business Research, a forecasting firm based in London, questioned what the central bank would do if inflation started to gather speed but unemployment barely moved.
Philip Booth, a director at the Institute of Economic Affairs, a study group, was more outspoken, calling the new strategy “the most dangerous development in U.K. monetary policy since the late 1980s.”
“To use monetary policy to reduce unemployment when inflation is already above target is playing with fire,” Booth said.
Carney is borrowing a strategy from his own playbook. In 2009, in his previous role as governor of the Bank of Canada, he committed to keeping interest rates stable for an extended period to help the country weather the financial crisis.
That decision greatly impressed Britain’s chancellor of the Exchequer, George Osborne, who hired Carney for the top job at the Bank of England, where the hope is that providing similar guidance to the markets will give the British economy a much-needed lift.