Last updated: December 9, 2013 8:01 pm

Bank of England’s Carney looks beyond rates to steer UK upturn

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Mark Carney©Reuters

Bank of England governor Mark Carney

Mark Carney said on Monday that he favours initially using tools other than interest rates to help control the UK’s economic recovery and to prevent the housing market rapidly moving from “stall speed to warp speed”.

In a dovish speech, the governor of the Bank of England indicated he was minded not to pull the lever on interest rate rises if unemployment falls quickly.

Although sterling rose on his words, the speech marked another attempt by the governor to damp expectations that he will raise rates in response to rapidly falling unemployment.

Speaking to the Economic Club of New York, Mr Carney also dismissed fears the UK was entering a period of persistent stagnation that would see optimistic forecasts brought back to earth. This Christmas, he commented, it was likely the economy would fulfil “the hopes and dreams of the holiday season”.

In the summer he stressed the importance of keeping interest rates on hold until unemployment fell to 7 per cent. Against the backdrop of an unexpectedly fast fall in unemployment this autumn, the speech seeks to damp expectations that the bank will tighten monetary policy when that threshold is met.

“It is unlikely that equilibrium interest rates will return to historically normal levels any time soon,” the governor said.

“This prospect [of low interest rates for a long time] puts a premium on macroprudential policies and financial reforms to manage the associated risks without abandoning the need to keep interest rates in line with the equilibrium level,” he said.

Answering questions after the speech, he said: “There is a history of things shifting in the UK and the housing market of moving from stall speed to warp speed and underwriting standards slipping. So we want to avoid that.”

FT Video

Barber and Gapper on Carney shift

October 2013: Mark Carney, Bank of England governor, has announced a change in attitude towards lending to financial institutions. Lionel Barber, editor of the Financial Times, discusses the implications of the shift with chief business commentator John Gapper

Highlighting the BoE’s recent action to limit the subsidies banks receive for mortgage lending – endorsed last week by the BoE’s Financial Policy Committee – he said the move, “helps ensure that monetary policy can remain as stimulative as necessary for as long as necessary to achieve its objectives”.

With a much more cheery tone than was usual from his predecessor, Lord King, Mr Carney said, “the ghost of Christmas present is a cheerful spirit”.

“Improved access to finance and raised expectations of future prospects led to a reduction in precautionary savings by households, a modest recovery in consumer spending, a revival in housing investment from very low levels and an increase in business confidence to a 15-year high,” he added.

Mr Carney’s comments came, however, as Robert Chote, chairman of the Office for Budget Responsibility, highlighted the likelihood that living standards would not begin to rise at normal rates for some time to come.

Mr Chote said: “We don’t actually get the 2 per cent a year real growth in wages and salaries that people would be used to from past historical experience for a couple of years still.”

Mr Carney endorsed the OBR’s analysis: “It would be unreasonable to expect these positive outcomes to materialise immediately. The recovery will therefore need to be sustained for a period before productivity – and real wage – gains can resume in earnest.”


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