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Reuters
LONDON
Bank of England Governor Mark Carney faced a challenge from lawmakers on Tuesday over the way the BoE changed one of its fundamental assumptions about Britain's economy, which helps it justify keeping interest rates at a record low.
The central bank surprised investors when it said earlier this month that it believed the unemployment rate could fall to 4.5 percent - down from a previous estimate of 5 percent - before it starts to push up inflation.
That could help the BoE to keep rates low for longer, despite the unexpected strength of Britain's economy after voters decided last year to leave the European Union.
Britain's jobless rate stands at an 11-year low of 4.8 percent. But wage growth has remained weaker than before the 2007-09 financial crisis, prompting the BoE to rethink the links between jobs growth, pay and inflation. In a meeting with lawmakers who focused on the central bank's patchy forecasting record, Carney was pressed to explain why the BoE had changed its estimate of the so-called"equilibrium unemployment rate"for the first time in years.
"This matters a lot because the Bank of England can allow forecast growth to rise without inflationary consequences once you've lowered this number,"Andrew Tyrie, the head of a panel of members of parliament that monitors the BoE, told Carney.
"And indeed that seems to be a crucial ingredient for your making of assumptions on whether to raise interest rates."
In a sometimes testy exchange, Carney said some members of the Bank's Monetary Policy Committee had felt for years that the equilibrium unemployment rate estimate was too high, and the decision to lower it was the result of an annual review. BoE Chief Economist Andy Haldane backed up Carney:"It's been there in the ether for quite a number of years. This is not a snap judgment we have suddenly made."
However, one MPC member, Ian McCafferty, told the lawmakers that he believed the rate stood at 4.75 percent, slightly higher than the consensus view of the nine-member committee.
