Business leaders welcome Carney’s move to link interest rates to unemployment fall

THE decision by the new Bank of England governor Mark Carney to hold interest rates at 0.5% until unemployment drops to 7% has been welcomed by business groups in the West Midlands.

The decision means the UK needs to create 750,000 net new jobs before rates can be reviewed, a move which take around three years.

Delivering the Bank’s quarterly Inflation Report, the new governor emphasised that even when the 7% unemployment threshold is reached, interest rates would not automatically be increased.

Unemployment in the West Midlands stands at 268,000 and increased by 0.7% to 9.8% in the quarter March to May. The rate is well above the UK average of 7.8%.

Carney’s decision means the unemployment threshold will hold unless inflation levels threaten to rise too fast or pose a significant threat to financial stability.

Until the threshold is reached the Bank will not cut back on its £375bn quantitative easing (QE) programme.

Chris Rawstron, partner and Head of Business Legal Services at Irwin Mitchell in Birmingham, said: “This announcement marks an interesting shift in the Bank of England’s approach to interest rate setting.  I expect it will be positively received by businesses across the West Midlands, particularly as it will help create an environment where investment decisions can be made with a reasonable degree of certainty as to what the cost of servicing any borrowing will be.”

PwC said Mr Carney had reason to be more upbeat about economic growth than his predecessor had been, just three months ago.

It said there were various reasons to be optimistic. June’s 1.9% surge in UK manufacturing output was the strongest growth since 2010; the most recent PMI index also suggested the service sector had grown at its fastest pace since December 2006, while July’s retail sales saw the fastest July growth in seven years.

However, it said that while all this served to inject further confidence into the UK recovery, caution was still needed in the regions.

It said forecast growth, relative to the pre-crisis years, would remain modest for the foreseeable future, with a distinct regional split.

More than half of all new private sector jobs have come from London and the South East, with growth in those regions alone for 2013 forecast as 1.2% and 1.4% respectively. But with other regions predicted to grow more slowly, UK average unemployment could hit the Bank’s 7% target while some regions are still struggling to deliver confidence, investment and growth.

Meanwhile, the Coventry and Warwickshire Chamber of Commerce welcomed Carney’s approach.

The chamber said the move would help businesses plan for the future.

Chief executive Louise Bennett said: “Low interest rates are certainly a key ingredient to the economic recovery and this statement from the Bank of England means firms won’t be left guessing ahead of the first Thursday of every month.

“They can now invest with some degree of certainty that there won’t be a sudden rise in rates and, if there is, it is because the economic picture is improving.”

She said the chamber now wanted to see a concrete commitment to underpin the economic recovery and that included further action to get an accessible Business Bank up and running.

“Access to finance remains an issue for companies across Coventry and Warwickshire and it is a topic we will be focussing on when our manufacturing and engineering group next meets in September,” she added.

Ian O’Donnell, Warwickshire & Coventry Chairman, Federation of Small Businesses, said: “Forward guidance linked to unemployment is a profound shift in monetary policy for the Bank of England.  We welcome this bold and imaginative thinking to secure the recovery.

“In the longer term, we hope it will give investors and firms looking to grow confidence to bring forward work which will in turn help increase employment.”