Bank Of England 0.5% Interest Rate And Jobs FAQ

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So new Bank of England governor Mark Carney has settled into his new chair and is ready to make his mark on fiscal policy.

He has declared his hand with remarks about interest rates and job, and this quick guide explains what they mean to you.

What’s the deal?

Bank of England official interest rates will stay at 0.5% until the jobless rate falls from 7.8% to 7% or less.

Carney and the Chancellor, George Osborne, expect this to take at least three years.

The announcement is to reassure mortgage payers and businesses that rates are not going to shoot up overnight and they have time to build a cash reserve or make other plans for when they do.

So that’s that until 2016 or so?

No. Carney is shrewder than that. He has built in checks and balances so if changes are needed earlier, the Bank can alter rates.

For instance, if inflation tops 2.5%, the Bank will revisit the deal to look at raising interest rates or introducing more money into the economy through quantitative easing.

What will this mean for retirement savings?

Unfortunately, savers will have to take a double whammy on the chin. Low interest rates coupled with 2% plus inflation means few banks or building societies will offer above-inflation interest rates, so in real terms, the spending power of retirement savers will fall away.

Is linking jobs with interest rates a good idea?

Carney prefers job data because it’s easy to interpret and not subject to retrospective changes, like GDP announcements. Also, more jobs means a healthier economy and more money sloshing around for consumers to spend, which should push up demand for goods and create jobs…and so on.

Does the Bank really need to do anything?

No. The signs are the economy is reviving and will continue to do so without intervention. His intention is to calm fears for bosses about taking on staff and expanding their businesses by telling them that interest rates will remain steady for a while yet.

However, Carney has warned the economy is still weak and has plenty of spare capacity.

So what happens now?

Nothing really, the monthly Bank monetary policy committee meeting is just a rubberstamp of the 0.5% for the foreseeable future until the economy hits one of the checks and balances.

What if the government changes in the next election?

The last Labour government decoupled interest rate decisions from the Cabinet and moved them to the Bank of England to avoid blame if rates went up. Nothing is likely to change if the government changes at the 2015 General Election. Although never say never…

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