Bank of England Govenor Mark Carney yesterday announced plans to link the Bank's base rate to inflation and unemployment figures.
In a proposal that is similar to the system implemented by the Fed in the US, Mr Carney said that the Bank would not raise interest rates until unemployment fell below 7%. It is currently closer to 8%.
A renewed recovery is now underway and it appears to be broadening, but the recovery remains weak by historical standards.
Mr Carney said that it was more important than ever for the MPC to be clear and transparent in order to avoid tightening.
He said in his opening speeck that this was the slowest recovery output on record.
"Unemployment still high, 1m more are unemployed than in the financial crisis.We have exceptionally weak productivity, a significant margin of slack in economy, scope for rebound very uncertain," he continued.
"Inflation is at 2.9pc and is likely to remain about that level in the near term. Underlying domestic inflationary pressures remain subdued. Even on the assumption that rate remains at current level, inflation will fall back to 2pc a little after the two year horizon. This is an exceptionally challenging environment in which to set monetary policy."
Julian Chillingworth, chief investment officer for Rathbones said that despite the strong rhetoric, the striking thing about Mr Carney's statement were the number of caveats.
He explained: "This is a statement of ‘ifs’ and ‘buts’, but the threat of higher inflation still looms. The statement has undoubtedly been helpful for Chancellor George Osborne’s aim of boosting the feel-good factor and might encourage a mini housing bubble.
"But there is a distinct balancing act here between preserving the wealth effect and curbing the perception that the economy is growing too fast, thus risking higher rate expectations. If growth is revised up in coming quarters and sterling remains weak relative to the dollar, inflation could rise sooner than expected, especially if there is an additional impetus from wage inflation."
Mr Chillingworth said that if growth is achieved there would be pressure from consumers for wage inflation - which as been non-existant over the past three years.
He continued: "Notwithstanding the political agenda for 2015, we believe interest rates could very easily rise by the end of 2014.”
Trevor Greetham, director of asset allocation at Fidelity said the details mean the inflation target has in effect been raised to 2.5% CPI from 2.0% until somewhere between 500,000 and 750,000 new jobs have been created.
He said that underneath a quite complicated announcement there was a "simple message".
"The degree of slack in the economy means policy will stay loose long into the housing-led recovery already under way. This is bullish UK equities and property, bearish sterling, though short run market expectations were already high," he concluded.
