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BoE’s Carney fails to impress with ‘Fed 2.0’

Antonia Matthews and Jenny Cosgrave
Wednesday, 7 Aug 2013 | 10:33 AM ET
Incoming Bank of England Governor Mark Carney
Getty Images
Incoming Bank of England Governor Mark Carney

Mark Carney, the governor of the Bank of England (BoE), followed in the Federal Reserve's footsteps on Wednesday by linking the outlook for interest rates to unemployment, but experts are unconvinced of the advantages of his new plans.

Carney opted to keep stimulus options open, acknowledging that while the U.K. recovery was clearly underway, it was still very fragile. Speaking at a press conference, he said the central bank would not raise interest rates above the current level of 0.5 percent before unemployment had fallen to a 7 percent or lower. Unemployment stood at 7.8 percent between March and May, according to official estimates.

After his announcement, Carney faced criticism for what some described as an "interesting experiment". Other said that in adding caveats to his commitment to keep rates low, Carney had delivered "forward guidance-lite".

(Read more: Carney unveils Fed-style forward guidance)

"Is Carney a banker or a lawyer?" asked Kathleen Brooks, research director at Forex.com. "He couched the announcement on forward guidance with an economic threshold with so many escape clauses it sounded more like he was reading a disclaimer," she said.

BoE's Carney: No rate rise until unemployment hits 7%
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.

The BoE's move echoes that of the U.S. Federal Reserve, which has also linked its low interest rates to high unemployment. The Fed is also targeting an unemployment rate of around 7 percent, with inflation moving back toward 2 percent.

"Where did 7 (percent) come from? It's a homage to the United States, to a certain extent," Alan Higgins, chief investment officer at Coutts, told CNBC.

Sebastien Galy, senior currency strategist at Societe Generale described the BoE's forward guidance as "very much Fed 2.0, but more prudent".

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

Carney declined to comment on whether the decision to introduce the unemployment target had been unanimous, saying only that this would be revealed when the central bank released the minutes of its policy meeting, on August 14.

"It will now be vital for the markets to see if these decisions were unanimous … Absence of unanimity will undermine the whole message and probably increase fears of earlier tightening," Nick Beecroft, Chairman at Saxo Capital Markets said.

Financial markets had been pricing in an interest rate hike by the BoE in the second half of 2015. While Carney has sought to push back expectations of a rate hike to 2016, some analysts warned that a sudden improvement in the U.K. economy could pour cold water on hopes for unchanged rates for the next three years.

"The recent upswing in the U.K. economy could change that (the interest rate outlook) rapidly," Joe Rundle, head of trading at ETX Capital, said. "Judging by the steady progress in macro indicators, it is difficult to rule out a rapid decline in the unemployment, which could initiate rate hikes earlier than even the BoE projects."

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