The Bank of England overhauled its policy strategy today, saying it planned to keep interest rates at a record low until unemployment falls to 7% or below.
This is something which is unlikely to happen for another three years.
Barely a month after Canadian Mark Carney took over as governor, the Bank of England said it would keep interest rates at 0.5% unless inflation threatened to get out of control or there was a danger to financial stability.
Mr Carney said a recovery in Britain's fragile economy was underway and it appeared to be broadening but he warned that it had a long way to go before it was on solid ground.
"This remains the slowest recovery in output on record," he told his first news conference since taking over at the Bank. "We're not at escape velocity right now."
The Bank of England followed the US Federal Reserve's approach by setting an unemployment target rather than committing to keeping rates low for a set period of time but included get-out clauses.
The bank's policymakers said they stood ready to buy more government bonds if additional stimulus was needed and would not reverse existing purchases while unemployment was too high. It said inflation was forecast to stay above its 2% target until the second half of 2015 based on market rate expectations.
"Attempting to return inflation to the target too quickly risks prolonging the period over which the nation's resources are underutilised," it said.
A growing number of major central banks are providing ''forward guidance'' to help nurse their economies back to health after the damage of the financial crisis.
For the Bank of England, the challenge is to hold off a premature rise in British borrowing costs at a time when signs of economic recovery at home and the US Federal Reserve's decision to phase out stimulus are pushing up market interest rates.
No UK rate rises expected until the end of 2015
Last month its Monetary Policy Committee took a step towards guidance by saying that a rise in British market rates was not justified by economic fundamentals, and it reiterated that point today. Markets already did not expect the BoE to start to raise interest rates until late 2015 at the earliest.
The Bank of England said today that Britain's economy had strengthened over the past three months. But output still remains more than 3% below its pre-crisis peak, a much weaker recovery than in the US or Germany.
It now forecasts the economy will grow 0.6% during the current quarter - the same as between April and June. It predicted that growth will reach an annual rate of 2.6% in two years' time, compared with 2.2% forecast three months ago, assuming interest rates stay on hold.
Unemployment is forecast to fall only slowly from its current level of 7.8% of the workforce, with the central bank expecting it to average 7.1% in the third quarter of 2016, the end of its forecast horizon.
This implies that the Bank of England expects to keep interest rates unchanged until at least that time, unless one of three conditions is breached before then. T
The bank will consider raising interest rates if their low level poses a threat to financial stability, if the public's medium-term inflation expectations rise dangerously high or if it forecasts that inflation in 18-24 months will be at 2.5% or higher.
It said that if those thresholds or the 7% unemployment rate are reached, the MPC would consider the case for interest rate rises on a month-by-month basis.
Inflation is forecast to average 2.9% in the last three months of this year - close to its current level and a lower peak than previously thought - and then to fall roughly as predicted three months ago.
British Finance minister George Osborne named Carney in November to succeed Mervyn King, impressed by the Canadian's reputation for innovative thinking and applying forward guidance while he led Canada's central bank.
Osborne welcomed the plan and said it was consistent with the government's "absolute commitment" to Britain's 2% inflation target.
Carney has previously stressed the importance of reassuring ordinary people and businesses that their debt costs are not going to rise any time soon in order to give them more confidence about spending which would help the economy.
The new governor also signalled he was not concerned about signs of a fast recovery in the housing market in some parts of Britain, especially London. "The housing market is starting to recover and actually the overall level of housing activity relative to GDP is a couple of percentage points lower than where it was prior to the crisis," Carney said at today's news conference.
Carney said he wanted to reach ordinary people with his forward guidance.
"Our biggest concern is the possibility that as the recovery gathers pace that there is an unwarranted change in expectations about the pace of the withdrawal from monetary policy stimulus," Carney told reporters when asked what his biggest worry was about the British economy.
He was asked for a second stab, for clarification.
"The message is that the MPC is going to maintain the exceptional monetary policy stimulus until unemployment reaches a 7% threshold, at which point we will reconsider," he said. "We will do this while maintaining price and financial stability."
