The BoE May Tighten Monetary Policy Even if the Unemployment Rate Does Not Decline

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The BoE May Tighten Monetary Policy Even if the Unemployment Rate Does Not Decline
The BoE May Tighten Monetary Policy Even if the Unemployment Rate Does Not Decline

The BoE May Tighten Monetary Policy Even if the Unemployment Rate Does Not Decline

Amidst the news that the National Institute of Economic and Social Research (NIESR) estimates show that Britain’s unemployment rate would not drop below 7 percent until early 2016, the Bank of England is likely to raise interest rates in the second half of 2015 which is still one and a half years from now.

Earlier the central bank of the country had promised that it would not interfere with monetary policy till the unemployment rate does not fall from its high seven percent. The new posture seems influenced from the fact that the unemployment is still a huge problem for the country and may take more time than expected and in such a situation, the BoE cannot wait for long.

NIESR has already declared in its forecast that Britain’s unemployment rate would not drop below 7 percent until early 2016. Whereas other economic indicators such as manufacturing and real estate has moved upward, unemployment is still lackluster and according to estimates, it is taking even more time than the BoE had expected earlier.

Market observers believe that the central bank of Britain could hike interest rates in mid-2015 so that its national economy is not overheated. According to NIESR director Jonathan Portes there may be a sense that consumer spending and possibly house prices are rising in a way that makes an ultra loose policy unnecessary.

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However, as Britain has kept its benchmark interest rate at a record low of 0.5 percent for five years now to underpin the economy as the global financial crisis struck, it cannot continue the same due to practical problems that may ensue from it. Nonetheless, earlier in August this year the central bank had said it would not consider raising rates until unemployment falls to 7 percent.

However, now that the desired level of unemployment is highly unlikely before 2016, the BoE is mulling a plan to tighten its monetary policy, particularly when Britain’s financial stability is considered to be at risk. Currently, Britain’s economic growth for the next year has gone up to 2 percent, a 0.2 percentage-point increase from August according to NIESR’s revised forecast.

British Economy is Still Where it was in 2008

Though there have been tremendous positive developments in the national economy of Britain, it is still smaller than it was before 2008. This fact also shows that the country has not been able to meet what it was expected from the various measures that it took to address the issue of recession.

To contact the reporter of this story: Jonathan Millet at john@forexminute.com