BoE's Broadbent says uncertainty backs case for linking guidance to jobs

Reuters

LONDON (Reuters) - A Bank of England policymaker has defended the central bank's decision to tie interest rates to the labour market, saying the outlook for growth and productivity are particularly uncertain despite a recent pick-up in Britain's economic recovery.

Ben Broadbent, one of nine members of the Monetary Policy Committee, said in a speech on Monday that the surprisingly strong acceleration in growth may settle down soon.

"The economy is growing. It's hard to say exactly how fast it's growing," Broadbent said in a speech delivered to the London Business School.

Data so far for the third quarter had been strong and surveys suggested the private sector was growing at an annualised rate of about 5 percent, he said.

But he warned that this might prove an over-estimate, and said the recovery might not keep up its current pace.

"Forecasters generally anticipate only around a third of changes in economic growth one year ahead, and we can be no more confident that the recovery can continue smoothly at this rate than in the view that it would never arrive," he said.

The Bank is seeking to nurture Britain's economy back to health, and said in August that it would not consider raising interest rates from their record low 0.5 percent until unemployment fell to 7 percent, unless inflation threatened to pick up strongly.

Financial markets have challenged the Bank's view that unemployment will take more than three years to fall to that level from its most recent reading of 7.7 percent.

British government bond yields have risen sharply and investors have brought forward their bets on when the Bank might raise rates. Broadbent said moves in financial markets were in large part due to signs of economic recovery and the Bank's guidance plan should help to temper price moves.

"I think that forward guidance will help protect against a big unwarranted rise in interest rates but ... not every rise in interest rates, forward rates, is unwarranted," he said.

Broadbent stressed that the Bank's guidance did not represent an unconditional promise to keep rates unchanged for a fixed period of time.

"If unemployment falls faster than we're expecting, either because productivity does less well ... or because demand grows more strongly, it would be right to ask whether we should think about withdrawing some of the monetary stimulus currently in place," he said.

Broadbent echoed the view of other Bank policymakers, including governor Mark Carney, that activity in Britain's housing market remained low by historical standards, contrary to some speculation about risks from a housing price bubble.

(Reporting by William Schomberg and Luisa Porritt; Editing by Kevin Liffey)

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