Carney unveils Fed-style forward guidance

Mark Carney

The new governor of the Bank of England (BoE), Mark Carney, has announced that the central bank will not raise interest rates until U.K. unemployment hits 7 percent. In July, it stood at 7.8 percent.

The FTSE 100 turned slightly negative following the news, while sterling rose against the dollar.

Unemployment figures themselves are not always reliable. For example, people employed under zero-hours contracts, who may not be working more than a few hours a week, might count as employed.

Marc Ostwald, strategist at Monument Securities, warned that this "looks like a big mistake." He pointed out that the MPC itself has acknowledged that "it is difficult to assess how many of the longer-term unemployed are in fact largely unemployable."

This guidance, similar to that issued by the Federal Reserve in the U.S., marks one of Carney's first departures from the reign of his predecessor, Mervyn King, who stepped down earlier this year. He made the announcement as part of the BoE's quarterly Inflation Report on Wednesday. In the U.S., the Fed has said that it will keep interest rates low until unemployment hits 6.5 percent.

(Read more: Bank of England's Carney in the spotlight )

The former head of the Bank of Canada seemed cautiously optimistic on the U.K.'s economy.

He told reporters: "A renewed recovery is now underway in the United Kingdom and it appears to be broadening" and cautioned that the recovery is "weak" by historical standards.

He added that he believes gross domestic product (GDP) in the U.K. will not hit its pre-crisis peak for another year.

"The MPC intends, at a minimum, to maintain the current exceptionally accommodative stance of monetary policy until economic slack has been substantially reduced, provided that this does not put at risk either price stability or financial stability," he added.

The BoE's monetary policy committee (MPC) predicted that annual growth will be 2.4 percent in 2 years' time, which will still be slightly below its historical average.

Carney has little room for maneuver with interest rates, which have been at a historical low of 0.5 percent for more than four years. Economists forecast they are likely to stay at this level for at least another year.

Carney also confirmed that the U.K.'s policy of quantitative easing will not change from the current £375 billion until the unemployment target is reached.

(Read more: Expect 'radical changes' from the Bank of England )

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