Bank of England Governor Mark Carney said Britain’s recovery will need to be sustained for a while before it is strong enough to withstand higher interest rates.
In a question-and-answer session after a speech at the Economic Club of New York yesterday, he said his forward-guidance policy at the U.K. central bank has been “effective” in holding down short-term rates and bolstering the economy.
“The historic relationship between monetary policy and purchasing managers indices and other indicators of forward demand would suggest that rates would have been increased already in the U.K.,” Carney said. “That’s what we were trying to guard against, which would have been in our view a premature withdrawal of stimulus.”
Carney introduced guidance in August to reassure Britons that the Monetary Policy Committee wouldn’t begin raising interest rates too soon. He said yesterday while news on the British economy has been “positive,” the recovery needs more robust global growth and that strong demand from the euro area remains “some way off.”
“As uncertainty diminishes, credit conditions improve and balance sheet repair progresses, monetary policy is gaining traction,” he said in his speech. “The Ghost of Christmas Past should not be forgotten. A recovery may be gaining pace but our economies are a long way from normal. Leverage is still high and weak demand for advanced economy exports could persist.”
The governor, who joined the BOE in July, said there are risks to the recovery from high household debt, the housing market and Britain’s current-account deficit. These developments “merit vigilance but not panic,” he told the gathering.
Carney took action last month to head off a potential housing bubble by diluting a credit-boosting program. The measure will help the central bank keep monetary policy loose for longer to ensure the recovery is maintained, Carney said. Mortgage approvals rose to the highest in almost six years in October, BOE data show, while measures of house-price growth have also strengthened this year.
“The BOE is alive to the risks of extended stimulus, and given its responsibility for macro-prudential policy, it can act in a timely fashion to mitigate them,” Carney said. “The bank demonstrated this flexibility recently with a package of measures targeted at the housing market.”
The BOE held its key interest rate at a record-low 0.5 percent last week, in line with guidance. Carney said yesterday that the policy, which links interest rates to unemployment, is giving households and businesses certainty that borrowing costs will remain low for some time.
“People get guidance,” he said in response to a question. “They understand it and they are acting accordingly.”
Carney said in the speech that the U.K. recovery will “need to be sustained for a period before productivity –- and real wage –- gains can resume in earnest.”
“The fundamentals are promising” that productivity growth will pick up alongside demand, he said. “If supply responds to recovering demand, unemployment will fall more slowly than otherwise and the point at which we will re-evaluate the stance of monetary policy will come later.”
The governor, chairman of the Financial Stability Board, also said there’s still a need to rebalance the global economy.
“Financial reform is about much more than fixing the failings in advanced economies; it is one of the keys to rebalancing the global economy,” he said. “The global savings glut will not disappear in the absence of further financial liberalization in China.”
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