Mark Carney set to adjust Bank interest rate policy

Bank of England governor Mark Carney is set to overhaul his flagship forward guidance policy on interest rates after just six months.

The governor had linked a rate rise to a fall in unemployment, but the policy is being reviewed after the jobless level fell faster than expected.

The changes will come as Mr Carney delivers the Bank's latest Inflation Report on the UK economy.

He said last month that the forward guidance policy needed to "evolve".

Mr Carney said last August that the Bank would not consider a rate rise from its current low of 0.5% until unemployment has fallen to 7%.

At the time, it was not expected that this threshold would be reached until 2016, but the latest unemployment rate stands at 7.1%.

BBC business editor Robert Peston does not expect the Bank to set a simple new numerical target, but rather to give "soft guidance".

He said: "I expect him [Mr Carney] to say that he expects interest rates to remain at their current low levels for some considerable time.

"And to repeat that as and when they do rise, they will not return to the levels we took for granted as normal in the boom years.

"This form of soft forward guidance is certainly not the bold hard revolution of last summer's announcement of a single statistical threshold for a rate change."

The policy was introduced to give households and businesses confidence that rates would stay low as the recovery took hold. But the faster than expected fall in the jobless rate unnerved investors and mortgage owners alike.

Last week, the Bank's Monetary Policy Committee (MPC) again held the benchmark interest rate at 0.5%, marking five continuous years at that level.

Mr Carney hinted last month, at the World Economic Forum in Davos, that the guidance policy needed to be adjusted when he said that the UK's economic recovery had "some way to run" before a rate rise could be considered.

The introduction of guidance was a shift from the Bank's previous tendency to maintain silence on the direction of interest rates.

Many economists expect the Bank's new guidance to be tweaked to take into account a broader range of factors to reassure that rates are not set to rise any time soon.

There has been speculation that factors such as real wages - which despite the recovery are still falling behind inflation - could be taken into account.

"It seems more likely that the bank will instead shift the focus to a broader range of indicators, including wage growth, as determinants of future interest rates," said Chris Williamson, chief economist at Markit.

Dame DeAnne Julius, one of the first members of the MPC, agreed that the Bank was likely to take a wider view.

"I think what he [Mr Carney] and the committee will probably do is broaden their analysis of the labour market - say it's not just about the headline unemployment rate, it's about full-time versus part-time, it's about self-employed versus employed workers, " she told the BBC.

"Now that the recovery is pretty firmly established, they need to begin giving the signal at some point that interest rates will begin to rise, hopefully slowly, towards a more normal level," she added.

Jonathan Loynes, chief European economist at Capital Economics, said that while changes to forward guidance would tackle the problems of relying on a single indicator - unemployment - they could make it more difficult to give a "clear and straightforward message".

But he said the recent fall in inflation and slight slowing of economic growth in the fourth quarter of 2013 should make it relatively clear that interest rates "are going nowhere for some time yet".

Inflation has now fallen to the Bank's target of 2% for the first time in more than four years, easing the pressure to raise rates, while the latest growth figures showed UK output rising by 0.7% in the fourth quarter against 0.8% in the previous three months.

It is likely that the Bank will on Wednesday issue new forecasts showing inflation will be weaker in the next two years than it previously projected.

"Coming out with a really low medium-term inflation projection would be a great excuse (and implicit forward guidance) for leaving the Bank rate on hold for some time to come - which is what recent speeches have suggested the MPC wants," said Alan Clarke, at Scotiabank.