Bank of England Governor Mark Carney pushed his message that there’s no rush to increase U.K. interest rates, saying there may be more slack in the economy than the central bank’s calculations show.
Speaking to lawmakers today, he said the amount of spare capacity is “at the upper end” of the 1 percent to 1.5 percent of gross domestic product estimated by the BOE in its Inflation Report last month. His comments underline a key area of divergence among officials, after policy maker Martin Weale said the level of slack may be overstated.
The central bank refocused its interest-rate policy, known as forward guidance, on spare capacity last month. The revamp came after unemployment fell faster than forecast toward the 7 percent threshold it set for considering a rate increase.
“We have provided guidance about how we think interest rates will adjust, when the time comes to adjust them; in other words, in a gradual, and to a limited extent,” Carney said at the hearing of the Treasury Committee in London. “We’re not complacent about the recovery.”
Noting comments by Deputy Governor Charlie Bean yesterday that the key rate may settle at about 2 percent to 3 percent once tightening begins, he indicated agreement with that outlook. The BOE’s benchmark interest rate is currently at a record-low 0.5 percent.
“Some members of the MPC have put more precise figures on the extent to which interest rates will be expected to rise, over the three-year horizon,” Carney said. “I don’t think that’s an unreasonable sense to get across -- a 2 to 2.5 percent bank rate over the forecast horizon.
The pound declined 0.2 percent to $1.6606 at 11:46 a.m. London time and was little changed at 83.40 pence per euro.
Carney also said today it will take ‘‘several” interest-rate increases before the BOE begins unwinding its 375 billion-pound quantitative-easing program.
The strongest economic expansion since 2007 has shifted investor focus to when the BOE’s unprecedented stimulus will be removed. As part of the next phase of guidance, the debate on the timing of rate increases will hinge on policy makers’ assessment of slack in the economy.
“I would personally be at the upper end of that range,” Carney said today. “Slightly higher than 1.5 percent.”
In written testimony to the lawmakers, Weale said his “best estimate of the amount of spare capacity in the economy is something under 1 percent.”
Weale said he was “more comfortable” with the guidance in February’s Inflation Report than with the initial policy which linked rates to the jobless data.
“While there are good reasons to expect rates to remain low for some time to come, it is, of course important to stress that we do not know the future and that the committee can give no guarantees,” he said.
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