Economy: Recovery has “some way to run” before interest rates will rise, says Bank of England governor Mark Carney
14:50 24 January 2014
Bank of England governor Mark Carney today insisted the recovery had “some way to run” before an increase in interest rates would even be considered, despite unemployment plunging towards the 7% threshold mooted for a rise.
Addressing a CBI business lunch at the World Economic Forum in Davos, Mr Carney confirmed the bank would look to update its forward guidance policy in next month’s inflation report just six months after making the pledge to hold rates at 0.5% until unemployment reached 7%.
He said the bank would consider a “range of options” to tweak the guidance, having last night signalled an apparent softening of the policy.
In an interview with the BBC’s Newsnight programme, he suggested the bank would look at “overall conditions in the labour market” rather than one indicator.
Mr Carney also stressed today that when rates change any such move will be “gradual”. He said: “Even though unemployment is falling faster than expected, the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy.”
He added: “The degree of stimulus will remain exceptional for some time. That should help reassure British business that the path of interest rates will be consistent with a sustained recovery.”
The Bank had not expected the rate of unemployment to fall to 7% until 2016, but this week the level fell sharply to 7.1%.
Despite recent assurances from the Bank that reaching the threshold would not trigger an automatic rise in rates, it is widely expected they will now rise sooner than first predicted. The pound has rallied as a result, hitting its highest level against the US dollar since May 2011.
Mr Carney cautioned there were still “headwinds” facing the British economy, with unemployment remaining a concern, productivity levels disappointing and real wages failing to rise in line with inflation at 2%.
He said: “It is not just that nearly three quarters of a million more people are out of work than before the crisis; another three quarters of a million more people are involuntarily working part-time.
“The effect of this slack in the labour market is evident in wage inflation, which is at around 1% so that, even with weak productivity, unit labour cost growth remains below 2%.”
The bank is also reportedly keen for the Treasury to lower the maximum loan under the second phase of its Help to Buy initiative, guaranteeing mortgages on new and second-hand properties worth up to £600,000, to prevent a housing bubble in London and the South East.
Mr Carney is pushing for a reduction to £400,000 or £350,000, according to the BBC.
He made no mention of the scheme in his Davos speech, but Mr Carney said the bank needed to be “mindful of the risks” of ultra-low interest rates, adding these mainly relate to housing markets in economies such as the UK.
Following Wednesday’s bigger-than-expected fall in unemployment, financial markets are pencilling in a rise in rates as soon as the first quarter of next year, or even as early as late this year.
Britain’s recovery has surged ahead over the past six months, with improvements seen across all sectors of the economy.
Mr Carney said global growth was also set to return to its pre-financial crisis level of 4% next year, with the UK and US leading the way.
Earlier this week, the International Monetary Fund (IMF) revised its growth forecast for the UK this year to 2.4% in a sharp upgrade from a previous figure of 1.9%.
But the bank has been keen to stress that UK growth is still far below levels seen before the financial crisis. Mr Carney said: “Many of the headwinds holding back the economy will remain for some time yet.
“Public and private balance sheets continue to be repaired. World demand remains weak and the appreciation of sterling will hold back the expansion of net exports. And there remain strains in the financial system despite good progress on post-crisis repair.”
Economists at JP Morgan Chase said the bank’s forward guidance policy had been a failure, adding it was right to ditch a specific threshold target.
They said: “The guidance framework has not just failed to offer the clarity the monetary policy committee (MPC) was seeking, but has, in our view, created unnecessary confusion and volatility in rate expectations.”
But Chancellor George Osborne, also speaking in Davos, dismissed suggestions that the bank’s forward guidance policy had failed.
He said: “I completely reject that forward guidance is a failure. I think what the Bank of England has done is provided clear communication, supported monetary policy that has assisted, alongside the Government’s efforts, a very strong new set of data in the United Kingdom.”
He said the faster-than-expected fall in the level of joblessness was a sign that economic policy was working. “Thanks to the success of policy − both Bank of England policy and Government policy − unemployment is falling very quickly so people are talking about what comes next. That’s a challenge of a success rather than a problem or a failure,” he said.
Asked about Mr Carney’s indication that interest rates may not rise if unemployment falls below the 7% figure, Prime Minister David Cameron told Bloomberg TV: “To be fair to the governor, he always said that this was a threshold, not a trigger.”