Bank of England's flagship rates policy set to be axed

The Bank of England's flagship forward guidance policy linking interest rate decisions to unemployment is widely expected to be ditched - in its current form - this week, after just six months

The Bank of England

The Bank of England's flagship forward guidance policy linking interest rate decisions to unemployment is widely expected to be ditched - in its current form - this week, after just six months.

The guidance pledges that policy makers will not even consider a hike in rates from their current low of 0.5% until joblessness has fallen to 7%, but this now looks likely to be achieved much more quickly than previously thought.

Bank governor Mark Carney told business leaders in Davos last month that the policy needed to “evolve” with changing circumstances – signalling that this would begin at its quarterly inflation report on Wednesday.

The aim of guidance is to assure households and businesses that the cost of borrowing will remain low for some time, giving them the confidence needed to help the recovery take hold.

Economists expect that it will now be tweaked to take into account a broader range of factors, in a way designed to bolster that message.

When the policy was announced in its current form in August, the Bank did not expect the unemployment threshold be achieved until 2016 but since then it has dropped much more quickly than forecast.

Latest figures showed the jobless rate had fallen to 7.1%, within a whisker of the target. It has brought forward City expectations of an interest rate hike, with some predicting they will rise as early as this year.

But policy makers have stressed they are in no hurry to increase the cost of borrowing.

Any pressure to do so will have been eased by the fact that inflation has now fallen to the Bank’s target of 2%.

Last week, the latest monthly decision of the Bank’s Monetary Policy Committee marked five continuous years at the 0.5% interest rate since it was introduced in the depths of the recession in 2009.

In his Davos speech last month, Mr Carney said the recovery had “some way to run” before any increase could be considered.

The introduction of guidance, marking a shift in Threadneedle Street’s policy, was overseen by Mr Carney shortly after he began his tenure as governor last summer.

Its latest modifications are likely to be seen in some quarters as a test of his credibility.

Experts have speculated that broadening out the terms of the policy could include taking into account factors such as real wages - which despite the recovery are still falling as weak pay growth lags behind inflation.

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