Following is a transcript of Bank of England Governor Mark Carney’s comments at a news conference in London today as he presented the bank’s quarterly forecasts.
NILS BLYTHE: Well, good morning, everyone, and welcome to the bank’s inflation report press conference. On my left is Paul Fisher, the bank’s executive director for markets. On my far right is Spencer Dale, the bank’s chief economist. Next to him is Charlie Bean, the bank’s deputy governor for monetary policy. And next to me is the governor of the Bank of England, Mark Carney.
MARK CARNEY, GOVERNOR, BANK OF ENGLAND: Thank you, Nils. Good morning, everyone.
A renewed recovery is now underway in the United Kingdom, and it appears to be broadening. Well, that is certainly welcome. The legacy of the financial crisis means that the recovery remains weak by historical standards, and there’s still a significant margin of spare capacity in the economy. This is more clearly evident in the high rate of unemployment.
It’s now more important than ever for the Monetary Policy Committee to be clear and transparent about how it will set monetary policy in order to avoid an unwarranted tightening in interest rate expectations as the recovery gathers strength. That’s why today, the MPC is announcing explicit state-contingent forward guidance. Our aim is to help secure the recovery, while ensuring that risks to price stability and financial stability are well contained.
There are clear signs that economic activity has strengthened this year. Recent positive indicators have led the MPC to revise up its growth projections significantly in this inflation report. Nevertheless, even under the assumption that the currently -- current exceptionally stimulative monetary policy stance is maintained throughout the projection horizon, the MPC expects annual growth to be only 2.4 percent in two years’ time, a rate still a little below its historical average.
Moreover, the level of GDP is not expected to regain its pre-crisis peak until a year from now. This remains the slowest recovery in output on record.
While job growth has been a relative positive in recent years, unemployment is still high. There are 1 million more people unemployed today than before the financial crisis, and many who have jobs would like to work more than they currently can.
The weakness in activity has also been accompanied by exceptionally weak productivity. It is for these reasons that the MPC judges there to be a significant margin of slack in the economy, even though the extent of that slack -- particularly the scope for a productivity rebound -- is very uncertain.
What is clear is that, even under conservative assumptions about the scope for a productivity rebound, the elimination of the margin of spare capacity will require a sustained period of robust growth. The MPC can help deliver that, but only if it is consistent with our primary objective to maintain price stability.
Turning to prices, CPI inflation was 2.9 percent in June and is likely to remain around that level in the near term, as it continues to be pushed up by past increases in import prices and unusually large contribution from administered and regulated prices. Nevertheless, underlying domestic inflationary pressures remain subdued. That’s why, as shown in chart three on page eight of the report, even on the assumption that bank rate remains at its current level and a sustained period of growth is delivered, inflation is expected to fall back to the 2 percent target only a little after the two-year horizon.
For that reason, the MPC’s judgment is that the path of market interest rates implies a faster withdrawal of monetary stimulus than appears likely given the current economic outlook.
Above-target inflation, coupled with a depressed level of output, make for an exceptionally challenging environment in which to set monetary policy. The uncertainty over the degree of slack in the economy and the responsiveness of productivity to the emerging recovery makes the MPC’s task harder still. In these unprecedented circumstances, the MPC has to decide how quickly to return inflation to target and how much support it is able to provide to activity unemployment.
The second document we are publishing today describes these tradeoffs inherent in the setting of monetary policy, and it describes how we are responding to them. It’s in this context that the MPC agreed at its meeting last week to adopt explicit forward guidance. The MPC intends, at a minimum, to maintain the current exceptionally accommodative stance of monetary policy until economic slack has been substantially reduced, provided that this does not put at risk either price stability or financial stability.
In practice, this means that the MPC intends not to raise bank rate above its current level of 0.5 percent at least until the Labour Force Survey headline measure of unemployment has fallen to a threshold of 7 percent. While the unemployment rate remains above 7 percent, the MPC stands ready to undertake further asset purchases if further stimulus is warranted. But until the unemployment threshold is reached, the MPC intends not to reduce the stock of asset purchases from the current 375 billion pounds.
The Bank of England’s unwavering commitment to price stability and financial stability is such that this threshold guidance will cease to apply if material risks to either are judged to have arisen. In that event, the unemployment threshold would be “knocked out.” The guidance will remain in place only if, in the MPC’s view, CPI inflation 18 to 24 months ahead is more likely than not to be below 2.5 percent; secondly, if medium-term inflation expectations remain sufficiently well anchored; and, thirdly, the Financial Policy Committee has not judged the stance of monetary policy -- has not judged -- pardon me -- the Financial Policy Committee has not judged that the stance of monetary policy poses a significant threat to financial stability, a threat that cannot otherwise be contained through the considerable supervisory and regulatory policy tools of various authorities.
The two inflation knockouts ensure that the guidance remains fully consistent with our primary objective of price stability. The financial stability knockout takes full advantage of the new institutional structure at the Bank of England, ensuring that monetary and macroprudential policies coordinate to support a sustainable recovery. To be clear, the knockouts would not necessarily trigger an increase in bank rate; they would instead be a prompt for the MPC to reconsider the appropriate stance of monetary policy.
Similarly, it’s important to be clear that bank rate will not automatically be increased when the unemployment threshold is reached. Nor is 7 percent a target for unemployment. The rate of unemployment consistent with medium-term price stability -- a rate that monetary policy can do little to affect -- is likely to be lower than 7 percent. Seven percent is merely a way station at which the Monetary Policy Committee will reassess the state of the economy, the progress of the economic recovery, and, in that context, the appropriate stance of monetary policy.
The threshold guidance we are announcing today makes the current exceptionally stimulative monetary stance more effective in three ways. First, it reduces uncertainty about the future path of monetary policy, in particular helping to avoid the risk that market interest rates rise prematurely as the recovery gains traction.
Secondly, it provides greater clarity regarding the MPC’s view of the appropriate tradeoff between the horizon over which inflation is returned to target and the speed with which growth and employment recover.
And, thirdly, it gives monetary policy greater scope to explore the potential sustainable level of employment and output without putting price and financial stability at risk.
Today’s Inflation Report contains for the first time, in chart 5.10 on page 47, the MPC’s projection for unemployment. It shows that, with bank rate remaining constant at 0.5 percent throughout the three-year forecast horizon, the MPC’s best collective judgment is that the median unemployment rate at the end of the projection period is 7.3 percent.
Chart 5.11 on page 48 is also new in this report, and it shows that unemployment is judged by the MPC to be as likely to reach the 7 percent threshold beyond the three-year horizon as before.
Now, it’s important to stress that forward guidance does not mean that the MPC is promising to keep interest rates low for a particular period of time. The path of bank rate and asset purchases will, as always, depend on economic conditions. What is new is that the MPC, in light of current exceptional circumstances, is today setting out the conditions that will need to be met before we consider increasing bank rate or reducing our stock of asset purchases.
We are introducing forward guidance as part of a mixed strategy which includes bank rate at historic lows, asset purchases, and the Funding for Lending scheme. That strategy is complemented by the Bank of England’s other policy tools, in particular, recent actions to increase the resilience of the U.K. banking and building society sector.
To conclude, there’s understandable relief that the U.K. economy has begun growing again, but there should be little satisfaction. Much is at stake as we seek to secure this recovery and return inflation to target. A fall in unemployment from the 7.8 percent rate now to the 7 percent threshold would, given normal growth in the labor force, mean well over 750,000 new jobs over the three-year forecast period. A recovery in productivity driven by a recovery in demand would mean faster growth of real incomes. Such outcomes would represent real improvements in the lives of people across this nation, and that’s why the MPC has made clear its intention, while remaining committed to price and financial stability, to conduct monetary policy to secure this recovery.
With that, be happy to take questions.
BLYTHE: Thank you. Now I would be grateful if you could identify yourselves before asking a question. Please do wait for the microphone to come to you. As you can see, there are lots of you here, so in the interests of letting as many people as possible ask a question, can you please keep it to a single question and then hand the microphone back?
QUESTION: Larry Elliott of the Guardian. Can you tell us what statistical relationship there is between unemployment and inflation in the U.K.? In the U.S., they use this sort of threshold, unemployment threshold, but there is quite a stable relationship between the level of unemployment and the level of inflation. I’ve never heard anybody say there’s a stable relationship of that sort in the U.K. I just wondered what evidence there is -- academic or otherwise -- to show that there is this sort of relationship.
CARNEY: I’ll take the start of that and then pass to Charlie. I think -- let me put this in the broader context first, which is that there is a considerable margin of slack in the U.K. economy. The question is how big that margin of slack is. Most of the questions around that degree of slack actually relate to how much slack is in firms, as opposed to how much slack is in the labor market.
We have -- currently, productivity is about 15 percent below pre-crisis trends. It’s not the judgment of the MPC that the scale of that gap is that large. But it is the judgment, the best collective judgment of the MPC, that there is a margin of slack, a margin of productivity that can be recovered as the economy recovers.
Now -- and we go through in this some detail in the accompanying report on monetary policy tradeoffs -- that aspect would suggest that, in designing guidance, one would look at the -- at measures of productivity, a measure perhaps of an output gap that encapsulated that. The problem is -- or the challenge is that that’s incredibly difficult to measure with precision.
What we can measure with much greater precision -- and which is related and a good indicator of how much overall slack there is in the economy -- is the unemployment rate. And so the judgment of the MPC was weighing up in designing guidance that would be appropriate for this set of circumstances that would be appropriate given the productivity puzzle that I started to describe in the U.K., was to use the unemployment rate, which is readily understood, widely available, not subject to revisions, and has a tighter relationship.
But for academic and other statistical relationships, I defer to Charlie.
CHARLIE BEAN: OK. I mean, Larry, I’m sure you’re well aware of the pretty substantial literature around unemployment in the 1980s and 1990s. One of the things that we learned during that period, exactly as you say, there wasn’t a simple relationship between, say, the rates of wage inflation and unemployment.
The standard view that emerged as a result of the work that took place in the ’80s and ’90s was that one had to allow for the equilibrium or natural rate of unemployment to move around. And it depends on lots of factors, things like the composition of the unemployed, the long-term unemployed, less effective at finding jobs than those who’ve recently lost them, obviously, unemployment benefits, the structure of the labor market in general matters.
So we have a much better understanding of the drivers of the equilibrium unemployment rate these days. Now, one of the interesting things I think about this downturn -- though there’s been lots of puzzles, particularly the productivity puzzle, actually, the joint behavior of pay growth and unemployment has not been particularly puzzling. That’s been pretty stable. You have to allow for some increase in the natural rate of unemployment.
There’s a box on pages 28 and 29 of the report which discusses our estimate of the equilibrium of unemployment rate in a little bit more detail. We think the sensible (ph) not too long (ph) in the very short-run measure of the equilibrium unemployment rate that tends to be factors like terms of trade shops (ph), which can have transient effects. I suppose you’d (ph) look at the more medium-term measure. That’s given in the dotted maroon line in chart eight (ph). We think that’s about six-and-a-half at the moment. But I say, the -- call it the wage Phillips curve has actually been behaving pretty well in this downturn.
QUESTION: William Keegan, the Observer. Mr. Carney, the MPC is responsible for monetary policy. To what extent do you think the government’s fiscal policy is inhibiting the reduction in unemployment you so clearly seek?
CARNEY: Well, a couple things. First, what we seek is price stability, as defined by the 2 percent inflation target. And what the challenge for the MPC is to chart the best path back to that 2 percent inflation target, given the weakness in activity, given the slack in the labor market, what -- and given the initial conditions, given that we’re starting with inflation at 2.9 percent and we fully recognize that there has been a prolonged period where inflation has been above target.
So we’re balancing the need to get inflation back and our primary responsibility of getting inflation back to the 2 percent target with -- with due consideration for output and employment. So just to be absolutely clear, this is about us fulfilling our primary objective, which is inflation, and given the circumstances, doing it in a balanced way.
And just to re-confirm why we’re using a threshold, there are a variety of thresholds that we could have chosen. We could have chosen real growth. We could have chosen some nominal indicators, some nominal levels. We could have chosen the unemployment ratio. We looked at a variety, and our analysis of that -- or summary of our analysis is detailed in the document.
In the end, what we’re trying to do -- and we landed on unemployment, not because it’s a target, not because it’s a target, but because it is the best summary indicator that gives a sense of the conditions at which -- conditions in the economy at which the MPC would begin to consider the possible withdrawal of the exceptional monetary policy stimulus that’s currently in place.
And to go back to the previous question, we fully recognize that there’s no one indicator that describes the economy. There’s no one indicator that describes the state of the labor market. And we go at some length in both reports to provide more detail on that.
QUESTION: David Smith, Sunday Times. Governor, the first and third of your knockouts look fairly clear-cut. The second one seems a little bit fuzzy. How will the MPC decide whether inflation expectations are well anchored? I think at the moment, 5- to 10-year inflation expectations are around 3.5 percent, which is obviously significantly above target.
CARNEY: Well, a couple things. First, you’re quoting a market rate for RPI inflation. Our target is CPI inflation. I’m sure you’re -- I’m sure you’re aware of the distinction; we certainly are.
The report provides a summary of work that the bank has done previously on a range of indicators of inflation expectations, some of which are market indicators, a number of which are survey indicators, a number of which are the forecasts of analysts of medium-term inflation and longer-term inflation.
We will look at all of those, as we always do, where we’ve reproduced in summary form the range of indicators that we look at -- we’ll look at those, as we always do -- we’ll look at them in a variety of ways. The view of members of the MPC is that when looking at inflation expectation indicators, it’s important to look not just at the level, but the change, the direction of change. It’s important to look at sensitivity to news, for example, sensitivity of those indicators to CPI -- actual outcomes on CPI, and to make judgments around that.
Just to be absolutely clear, the individual members of the MPC will be making -- as they always do -- but will be making their assessments, and they’ll be particularly important in this context -- their assessments of the outlook for inflation, the probability that inflation could be above 2.5 percent 18 to 24 months out -- and we spell out how we calculate that -- they’ll be making those determinations each time we meet, as well as making a determination about whether inflation expectations remain sufficiently well anchored.
So we’re setting out the inputs to those decisions in the report.
QUESTION: Guy Faulconbridge, Reuters. There’s much concern that the Help to Buy scheme may create a housing bubble in the U.K. Do you share those concerns? And perhaps you could share with us your biggest worry about the U.K. economy and whether you’ve lost any sleep over it. Thank you very much.
CARNEY: Well, I think our biggest concern is, at this stage, and that over which we have the most influence, our biggest concern is the possibility that as the recovery gathers pace that there is an unwarranted change in expectations about the pace of the withdrawal of monetary policy stimulus. That is the point -- that is one of the principal points of providing explicit forward guidance, so that people whether they are market participants, maybe most importantly whether they’re running businesses, individuals across the country, they understand the conditions under which the MPC would begin to consider the withdrawal of stimulus. And just to reiterate, that would begin to be under consideration once the unemployment rate hits 7 percent, the 7 percent threshold.
With respect to Help to Buy and the housing market more generally, obviously, it’s something that we watch closely, not just in terms of the conduct of monetary policy, which is the topic today, but in the Bank of England’s broader responsibilities for financial stability. We do watch it closely. I think we have to put recent developments in the housing market in context. We still see -- for example, mortgage applications are well below historic averages. They’re not yet at 60,000. That’s one of our key judgments, as we expect them to move above 60,000.
We see high loan-to-value loans -- proportion of loans that are high loan-to-value about 40 percent. Spencer, normally, they’ve -- pre-crisis, they got up to about 70 percent, I think.
We -- valuations are still quite a bit off. They’ve started to recover, but they’re still quite a bit off, whether you measure them on a price-to-rent basis or relative to income.
So it’s -- the housing market is starting to recover. And actually, the overall level of housing activity relative to GDP is a couple percentage points lower than where it was prior to the crisis, so it needs to be put in context. And I think the last thing to put in context -- actually, Spencer, I’ll ask you for the exact figure -- but Help to Buy relative to...
SPENCER DALE: Yeah. So, I mean, there’s two components to Help to Buy, which I think sometimes get muddled up. There’s one, which is the shared equity scheme, which is operating at the moment, and there’s a second one, which is the mortgage guarantee scheme, which isn’t yet operating and the details of which aren’t yet known.
In terms of the shared equity scheme, the main focus of that is on people buying new houses and designed to encourage the building of new houses. I think in my experience, in traveling around the country, that’s working. I go and speak to house builders. They are building new houses, so that component’s working.
But it’s important to keep the size of that component into some sort of perspective. So the current rate of that is something like 3 percent or 4 percent of total housing transactions accounted for by the Help to Buy -- the equity component. So I think it’s doing its job, in terms of encouraging new house builds, but the idea that it’s somehow fueling a housing boom I don’t think really stacks up in terms of just the size of the numbers.
QUESTION: Sam Fleming from the Times. Governor, first of all, how much weight should firms and households be putting on this guidance, given the Bank of England has had quite a patchy forecasting track record in the past and, also, in the same context, the fact that the MPC itself will change its composition over the next few years? And, in fact, we don’t even know today how united the MPC is behind this particular policy.
CARNEY: In terms of -- in terms of the weight, what we’re doing is we’re setting out very clearly the conditions under which the MPC would consider adjusting the current exceptional level of monetary policy stimulus. We have provided, if you want to wade through it -- and, Sam, I’m sure you will -- specific sensitivities around the -- what would the unemployment rate be, given various growth rate -- average growth rates, at - - the extent to which that growth is on the supply side, comes from productivity -- we have those data tables -- the degree of where the unemployment rate would be, given various growth rates and participation rates, as well. We provided that analysis.
So there’s ways to cross-check the different ways the economy could get to 7 percent. And obviously, individuals, firms, economic analysts, journalists, others, you know, have different views about the outlook for the economy. It could be stronger or weaker than the MPC’s view. I would note that we have -- I would re-emphasize that we’ve significantly marked up our central tendency for the U.K. economy, both in terms of growth, with this forecast.
And so people will have different views; that’s entirely reasonable. What they should coalesce their views around, though, or what this has given an opportunity to focus those views on is the conditions under which the monetary policy would -- committee would -- would intend to consider the possible withdrawal of monetary policy stimulus.
Now, we can’t -- in terms of the composition, the composition of the Monetary Policy Committee will change over time. And there is -- again, I’ll speak in possibilities -- there’s certainly the possibility that there will be new members of that committee before the threshold is reached. Those new members, as every member of the MPC is, will be independent. They will form their own views.
The members of the committee at present will form their views on both bank rate and asset purchases at each meeting in the context of the guidance that we’ve given. But, again, I’ll just re-emphasize, if their outlook for inflation is above the inflation knockout, if their concerns -- if they have concerns about whether inflation expectations are sufficiently well anchored, they would -- naturally, it would follow, they would judge that that guidance no longer applies, and that would influence.
And I would just make one final point, which is that the recovery were to falter or if an individual member of the MPC had a view that additional stimulus were required, under this guidance, they would be in a position, as they always would as an independent member, to support further asset purchases or other elements of a mixed strategy to ensure that we achieve our primary objective, which is price stability, while supporting output and activity -- output and employment.
QUESTION: Ben Chu from the Independent. Governor, you’ve spoken in the past about the importance of economies achieving escape velocity when emerging from recessions. Is it your view that the U.K. economy is now traveling at that speed? And if not, at what stage on these present forecasts do you think we will achieve that speed?
CARNEY: Well, the short answer is, no, we’re not at escape velocity right now. We’re -- the welcome news is that the economy is returning to levels of growth that could begin to be described as approaching historic averages, historic averages, after a prolonged period of very weak -- very weak performance.
The guidance provides a sense of the conditions under which we would start the judge -- we being the MPC -- would start to judge whether -- to use the terminology -- whether the economy is at escape velocity, whether it is consistent with a sustainable recovery, and whether, in the context of our primary objective, which is price stability, an adjustment in monetary policy is warranted.
QUESTION: Jennifer Ryan from Bloomberg News. I wanted to see if you could talk a little bit more about the reasons behind the pickup in your expectations for growth. It was a pretty big revision from May to August, and I wondered if you could talk about the extent to which you see the factors that are figuring in the pickup now and the recent data as being sustainable.
There’s been a big consumer-led element to it, and as you know, wage growth hasn’t been great. People have been dipping into their savings. So why further out should we see that the recovery has further traction to go?
CARNEY: Well, there’s a broad range of indicators that support the MPC’s revised view or updated view of growth in the U.K. economy. They range from softer indicators, survey indicators, whether it’s the CIPS data, other indicators of business intentions, hiring intentions, to harder data, the manufacturing -- recent manufacturing data, retail sales data on the housing market, performance of the consumer during a period -- it has to be said -- during a period where there’s some volatility because of shifting in time of compensation payment, some volatility in the savings rate that is there, but consumer confidence levels that have recovered significantly, as well.
So there’s a variety of both hard and soft data that -- including, I should add, on our soft data -- our agent surveys around the country that are supportive of this revision.
With respect to the consumer -- and to be clear, in terms of the components of growth going forward -- obviously, consumption, largest share of the economy, plays -- household spending does play an important role. But we see that consumption growth is broadly in line with income growth. There is not embedded in this projection a material increase in our expectations of -- or there’s -- we do not expect material increase in borrowing over the horizon. We detail that in the report.
The housing -- the recovery in housing activity from very low levels means that there is an important contribution from housing, as well. And as you get farther out in the projection horizon, forecast horizon, we see business investment starting to pick up. As one would expect, there’s that -- that lag response on the business investment side.
QUESTION: Jeremy Warner, Daily Telegraph. The BIS recently expressed a number of concerns about the long-term consequences of prolonged period of negative real interest rates. Do you share those concerns?
CARNEY: Well, we share -- we fully recognize that a prolonged period of low interest rates could -- if unattended, could lead to some financial vulnerabilities. And that’s why we put in place the financial stability knockout, so that we use to the fullest the institutional -- the new institutional structure of the Bank of England, so that we get the benefit of the perspective and advice of the Financial Policy Committee.
But it’s not necessary to have a financial stability knockout to address the types of issues to which you’re alluding and the BIS was discussing. The FPC and the PRA spend appropriately so -- in fact, the issues around so-called low for long interest rates are one of the top vulnerabilities that the Financial Policy Committee has identified for the U.K. economy and has gone through in some length, as most recent FSR.
There are a variety of tools that can be used that -- to address those. They start with supervision, effective supervision of institutions. They include the possibility of sectoral adjustments, Pillar 2 capital, other adjustments that could be brought into place. They would include a range of measures in markets, as well, if necessary.
In sum, the point is that there are several lines of defense, both in terms of microprudential supervision and regulation and macroprudential policy, before one even gets to monetary policy. And I think the only -- change of emphasis I would -- at least in the reporting of the BIS analysis -- is to make the emphasis on going to -- using all of those lines of defense first before the very blunt tool of monetary policy is used or is considered to be used.
QUESTION: Hugo Duncan from the Daily Mail. Governor, how worried are you or concerned are you about the ability of the banking system to support this recovery? And might there be further movements on credit easing, Funding for Lending, and so on, to encourage lending, particularly to small businesses?
CARNEY: OK. Well, the first thing -- two parts to that answer -- and I’ll ask Paul if he has anything to supplement on Funding for Lending -- the first is that there has been considerable progress made in recent years and in recent months on enhancing the resilience of the U.K. banking system.
We have over 50 building societies that meet the leverage ratio now. We have virtually all of the major banks that meet the leverage ratio, and the last remaining bank has put in place a credible plan to achieve that in a realistic timeframe.
So the core capital position of the U.K. banking system is substantially improved. Also, the risk profile of the -- of the system is substantially improved. And the consequence of that is that the ability to provide lending to the real economy has improved, and improved not just at this point in time, but importantly over the course of the forecast horizon, because the one thing we know -- we don’t know exactly what shocks the U.K. economy will face over the course of the next three years -- but undoubtedly we will spend -- face some shocks, and it’s important not just to be there in the better times, but to be there when things get more challenging.
In terms of -- just to reiterate what I said earlier -- in terms of the actual credit creation that underpins the -- underpins the economy, there is some, but it is -- it is not a return to the double-digit levels by any stretch of the imagination that we saw pre-crisis.
Finally, in terms of Funding for Lending, I mean, I’ll ask Paul to speak to that, but I’ll make the general -- the general comment that the bank as a whole and the MPC as appropriate will continue to look at any sensible adjustments that can be made to any of our facilities within the context of our mandate in order to appropriately -- appropriately support sustainable credit -- credit creation in this economy.
FISHER: Yeah. I think we can say that, when the Funding for Lending scheme was introduced just over a year ago, the ability -- the ability to raise funds and the cost of those funds was an issue of potentially holding back credit growth (ph). I think it’s certainly safe to say (ph) that that’s no longer the case.
The big banks are certainly out there saying (inaudible) they’ve got plenty of funds to lend if they can find the right businesses to lend to. And the report details the reduction in funding costs over the past year. So I think in terms of making sure that funding is not an obstacle to lending, the FLS has achieved that objective. Still further to go in terms of seeing the amount of credit pick up, particularly to small businesses, but shortage of funding is no longer the problem.
QUESTION: Claire Jones, Financial Times. Governor Carney, how strong was the agreement among members of the MPC that unemployment was the right variable to use? And was the decision on guidance in this exact form unanimous?
CARNEY: Well, as with any decision of the MPC, we don’t comment until the -- comment on specific individuals’ opinions or on specific votes comes out with the minutes. The minutes are coming out next Wednesday, so you’ll be the first to read them, I take it, given your interest.
QUESTION: Paul (inaudible) from the Economist. Given the first knockout, one interpretation of that would be that you’ve -- or the MPC has temporarily raised the inflation target to 2.5 percent. Do you accept that? And doesn’t that raise a concern about the credibility of the Bank of England’s inflation-fighting credentials?
CARNEY: Absolutely not. There has been no change to the inflation target. The inflation target remains 2 percent. It applies at all times. The knockout reflects the initial conditions that we’re faced at this point in the recovery. Inflation is at 2.9 percent. The question is, what is the appropriate path to return that to the 2 percent inflation target? We’ve set a knockout that -- and we’ve given the probability that the knockout, in our best judgment, that that knockout would be triggered, given where we are today, which is roughly around 40 percent, and that’s detailed in one of the charts. I can’t remember...
BLYTHE: Chart four, page eight.
CARNEY: Chart four, page eight. Thank you. And so this is about the right path to bring inflation back to target, while supporting output and activity.
QUESTION: Michael Bird, City AM. There have been suggestions that the jobs emerging since the crisis are lower paid and less stable than a lot of the ones they replaced. If that indicates that households might still be deleveraging and uncertain, is the composition of new employment something the MPC will be considering alongside the headline rate of unemployment?
CARNEY: Well, without question, we have to consider a range of indicators, and we always consider a range of indicators in formulating monetary policy. The -- we have -- for simplicity and for clarity, we have chosen a specific labor market indicator, the unemployment rate, to -- as our threshold condition, but without question, when assessing the appropriate stance of monetary policy, we look at a wide range of indicators. And specifically to your question, we are -- the members of the MPC are well aware in setting policy that the number of part-time jobs has increased by more than 2 percentage points as a proportion of overall jobs that -- average hours worked, while it has been relatively strong, as many labor market indicators have been, given the scale of the recession and the weakness of the recovery, average hours worked is not yet back to pre-crisis levels. Total hours worked actually are back to pre-crisis levels, so we look at a range of indicators in terms of assessing the stance of the labor market.
And just, again, as a bit of a guide, we provide a lovely spider diagram in the document which gives you a sense of where things are. The one thing I would take from that, actually, is that in terms of -- and this diagram gives you a sense of the standard deviation from the longer-run averages -- that actually most labor market indicators are relatively -- sending relatively similar signals in terms of the degree of slack in the labor market. In other words, there is slack in the labor market across things, but we will watch all elements closely.
QUESTION: Phil Aldrick of the Daily Telegraph. There’s been a lot of pressure for -- a lot of stress on the rebalancing of the economy. And this commitment, the rates will be low at 0.5 for potentially three years. You could argue that that is a case for encouraging an unbalanced recovery. And alongside that, just wondered if you could give us an idea of what FPC knockout -- give some examples of an FPC knockout. Are you concerned about the unbalanced economy, Governor?
CARNEY: Well, I -- without question. I mean, the bank and the MPC have long been focused on this issue of -- of rebalancing, and it’s part of ensuring a sustainable recovery. Let’s be clear. There’s a few aspects to rebalancing. There’s the process of deleveraging of households and financial institutions. There’s been -- there has been progress on that front. Household debt-to-income has fallen by more than 20 percentage points. Financial institutions have raised considerable capital. They have derisked their businesses to some extent, as well. So there has been progress. There’s also -- obviously, the rebalancing is necessary on the fiscal side, which is in train.
In terms of the other element, though, is -- and it’s very much related, in terms of the overall level of savings -- balance of savings and investment in the economy -- is on the external side. And in a -- in a global economy that remains relatively weak -- actually, Charlie, I think I’ll ask you to supplement this -- but in a global economy that remains relatively weak, and certainly with our largest trading partner, which despite some recent improvements is -- is still moving sideways, meaning Europe, the path to sustainable rebalancing is to increase productivity.
And one of the advantages of the approach that we’re taking -- there’s little monetary policy can directly do, do to influence productivity, but one of the advantages in terms of setting this guidance, this threshold-based guidance, is that it allows us to test the degree to which productivity will recover alongside demand, and by helping to spur demand, we test that, and there is a dynamic aspect to this guidance. If we see more of demand being met by supply, all other things being equal, that means that it will take longer to achieve the threshold, which will mean more stimulus over that time.
But, Charlie, do you want to talk more broadly?
BEAN: Well, I mean, it’s no secret that the MPC would like to have seen rebalancing in the form of an increase in the share of net trade and also, ideally, an increase in investment. But the fact is, achieving that against the background of a depressed global economy -- particularly our key export markets, the eurozone -- that’s not a particularly propitious backdrop.
Now, the decline in the exchange rate that we had in 2007- ’08 should have gone some way towards helping that. Indeed, if you look at exports of goods, that has, indeed, been boosted by the exchange rate depreciation. But unfortunately, at the same time, we found ourselves being subject to essentially a -- think of it as a loss in comparative advantage in financial and business services, probably brought on by the financial crisis, so that the contribution from that sector has been less than we would have hoped.
Now, as we go forward, hopefully as we start seeing the rest of the world picking up, we will see our strong contribution from net trade. As far as investment goes, you can’t expect businesses to be increasing investment against the backdrop of relatively weak demand for -- for their products. So to some extent, you need also some pickup in domestic demand to expect to see some pickup in business investment.
We do expect to see a pickup in construction investment, housing investment in particular, and that -- and going back to an earlier question, that’s one of the factors behind the recovery and momentum in growth in the near term. And that’s clearly something that is good for the economy. We need more houses. But the pickup in business investment comes farther down the road as the recovery appears more entrenched.
QUESTION: (OFF-MIKE) News. Today’s strategy clearly needs to be communicated to a wide audience. What’s the message that you want ordinary businesses and ordinary people to hear today?
CARNEY: The message is that the MPC is going to maintain the exceptional monetary policy stimulus until unemployment reaches a 7 percent threshold, at which point we will reconsider. That means if nobody else enters the labor force, that means 250,000 jobs. Under a normal period of labor force growth over the three-year horizon, that means 750,000 more jobs, same participation rate is there.
The second message is that we will do this while maintaining price and financial stability. So we’ll do this in a fashion that respects our primary responsibility for price stability and our secondary responsibility for financial stability. And the combination of that is to secure a sustainable recovery.
QUESTION: (OFF-MIKE) Sky News. Governor, you say in your commitment to forward guidance that this shouldn’t rule out future asset purchases necessarily, but you’re not necessarily saying all that much in the report about what those purchases might be, the particular type of quantitative easing, and I’m just curious to press you on whether you feel the particular breed of QE that the Bank of England has followed in the past, so buying up government bonds, is necessarily -- is necessarily the best form of asset purchases for the future and whether you would support something like that?
CARNEY: Well, the -- this is the -- the policy that we have at present, the strategy we have at present, which is the adoption of this threshold-based forward guidance, which includes, obviously, bank rate at 0.5 percent, the existing stock of asset purchases that’s in place, the 375 billion, and taking into account Funding for Lending and other things that the bank has put in place to strengthen the banking system. In the MPC’s judgment, that’s the appropriate stance of monetary policy for -- to achieve the inflation target and to help secure the recovery.
So it’s not a question that this -- for today about considering additional measures. That’s only a question that would be addressed in -- and is a question we will always ask ourselves appropriately at subsequent meetings, just as we will ask ourselves the questions of whether the knockouts have not yet been breached or whether or not the knockouts have been breached.
So it would be -- I think it would be inappropriate for me to speculate on what we might or might do under future hypotheticals. And in any event, I would only be one of nine individuals who would be making those determinations.
QUESTION: (OFF-MIKE) World Business Press. I was going to ask a similar question, but just to expand on what might trigger more quantitative easing and what could lead to the Bank of England to begin selling gilts back to the markets, and also if you’ve considered buying commercial assets, as well.
CARNEY: Well, I’m going to -- given the similarity of the question, I’m afraid, I’m going to -- I’m going to refer to my earlier answer in terms of -- I just don’t think it’s constructive to -- and it wouldn’t be appropriate to speculate on different policies.
We’ve made a decision. We’ve adopted this strategy. This is the appropriate stance of monetary policy, in the MPC’s judgment, for this point in time, to help secure the recovery. With respect to one of your questions that was embedded in there, I’ll just turn to Paul in terms of restating our -- our views on asset sales when the point comes in time.
But I would say, just as a preview of that, that our approach here very much reinforces that view, because we have committed to reinvest all of the proceeds of maturing -- all the cash flows associated with maturing gilt during the period of time during which the forward guidance is in place. But, Paul?
FISHER: Yeah, so on asset sales, what we have said is that we would only commence asset sales at a time when we thought we could do over a sustained period of time in order to keep an orderly (ph) debt market. The presumptive plan currently is that we will raise interest rates before we would start asset sales, but that’s not a commitment. That’s just a planning that we’ve got for now.
What we won’t (ph) want (ph) to do is use asset sales an active instrument where we buy some one month, sell some the next. When we get into asset sales, it will be because we want to do it over a sustained period of time in an orderly fashion.
QUESTION: (inaudible) CNBC. Thank you, Governor. You touched on it briefly, but can I just ask you how you view the eurozone risk? In the report, you said domestic recovery continues to emanate from abroad, and you refer to the eurozone.
Has that gotten better? Has it subsided?
CARNEY: There has been over the course of the last -- over the course of the last year, there has been important progress, and there remains important work in progress in the eurozone to -- to construct a sustainable monetary union and to enhance the potential of the European economy. There has been progress on banking union. The recovery resolution directive, which also applies here, is something we very much welcome and support.
The upcoming asset quality review by the ECB will be important in further enhancing and reinforcing the resilience of the European banking system. It’s absolutely essential. A variety of structural reforms on the national level have -- to varying degrees -- have been put in place. And the monetary measures of the ECB have very much helped to contain both tail risks and, to the extent possible, in a banking system that’s -- financial system that is still quite fragmented, the extent possible, have done much to support output in the context of their price stability mandate.
But we should not get ahead of ourselves in terms of expectations from the eurozone. There remain risks. Senior European authorities and political figures are well aware of these risks. They’re working hard to try to minimize them, but there remain risks.
And in fact, in our forecasts, we don’t fully include the most extreme risks that could emanate from the eurozone in constructing our forecast. So -- and then the last point I’ll make is that it -- it -- while the market -- while the eurozone economy has stabilized and is beginning to pick up slightly, this is -- in order to gain significant exports into Europe, British firms will need to continue -- will really need to build their competitiveness by investing and improving productivity, because it’s not going to be driven by very strong demand pull in our best judgment.
QUESTION: Hugh Pym, BBC News. Governor, what do you say to those who say, well, indicators in the last few days about U.K. growth have been pretty positive? You yourselves have revised up your growth forecast for this year and next to a pretty healthy looking 2.7 percent. You’ve already successfully persuaded the markets that a rate rise is going to be somewhere in the future. What’s wrong with the existing starts? Why do you need to bind your hands by doing more?
CARNEY: Well, a couple things. First, the last bit of your comment question, to be absolutely clear that, with the combination of the thresholds and the knockouts, hands are not - - hands are not bound here. What we’re -- what the MPC is doing is it’s providing much greater clarity about how we would react to underlying economic conditions, how we’d set monetary policy.
But to go to the big part of your question is, why now? This is exactly the time when something like this is appropriate. It’s -- we are at the start of a renewed recovery.
As I said in my opening comments, this is very welcome. But it’s after a very long period of -- it’s after a very sharp recession and a very long period of very weak activity. This is the weakest recovery on record. Records go back over a century.
Let’s put it in context. There is -- there is significant slack in this economy. And there is -- to some extent, in the relief about the recovery, there is an understandable -- expectation can build up that that immediately means pulling back on the exceptional monetary stimulus, which is really at the heart of helping to get the recovery going.
And what the MPC is saying here is that we need to make further progress, and we need to reach certain threshold -- a threshold -- at a minimum, that threshold before we consider pulling back. And we’re doing it in a way, again, that fully takes regard of our responsibilities on price and financial stability.
QUESTION: Faisal Islam, Channel 4 News. Governor, is this -- just for clarity’s sake, is this basically a clarification of communication kind of designed as a -- as a beacon to the great British public to increase their demand for credit and for money, which has been lacking? Or is it actually a loosening of policy?
CARNEY: First and foremost, it is a clarification. This is -- what this does is make stimulus more effective. We have exceptional monetary policy stimulus in place. This is about making that monetary policy stimulus more effective. It does it in three ways. It provides greater clarity about what we’re trying to achieve, what’s the path. Everyone knows we have the 2 percent inflation target. What’s the path that we think -- the MPC thinks is best for the economy in terms of returning inflation to 2 percent, while supporting -- to the extent possible -- activity in employment?
The second thing is, it reduces uncertainty. My response to Hugh Pym just now just referenced that. It reduces uncertainty, because there can be a premature view -- premature withdrawal of monetary policy stimulus as the recovery starts to build up.
And the third point, which is maybe the most subtle, is that this provides a robust framework in order to test how much excess supply there is in the economy, not just within the labor market, but within firms. And it’s a -- it’s a robust framework because it has with it those price -- two price and one financial stability knockout, which disciplines the framework as a whole, as we test to see how supply comes on as the economy recovers. It’s more effective.
BLYTHE: We’re almost out of time, but we’ve had -- a bunch of people over on this side have had their hands up for a long time. Richard, quick question?
QUESTION: (OFF-MIKE) this is still quite complex guidance.
You’ve got the three knockouts. You’ve got this handy 44-page booklet explaining your thinking. Is one to understand that it’s your intention to give somebody making a big decision on borrowing that interest rates by your best estimate are likely to stay where they are until the middle or late 2016?
CARNEY: The -- this is -- this is -- if you look at page seven of the Inflation Report, for what it’s worth, on the top half of the page, it tells you everything you need to know, Richard, and I can read it to you later, if you’d like me -- like me to.
The -- what we’re -- we’re -- what the MPC is doing is giving a sense of the economic conditions that would have to be achieved before we consider -- consider -- starting to withdraw the exceptional monetary policy stimulus that’s in place, not a point in time, but the economic conditions. And that economic conditions is one -- it’s one. It’s the unemployment rate. Everyone knows what the -- everyone in this room knows what the unemployment rate is. The unemployment rate is reported monthly. Everyone can understand what the concept is. Unfortunately, a lot of us know people who are unemployed or have just become employed.
It is something that’s real, it’s tangible, it’s widely understood, it doesn’t get revised -- or if it’s revised, these are minimal revisions. And so for a business, for an individual, you have a pretty good sense of where it is.
Now, furthermore, we provided our best view on where unemployment is going to be. We have, for the first time, published our forecast of -- the MPC’s forecast of unemployment.
In this case, today, we’ve published a forecast that’s conditioned on bank rate remaining constant for the next three years and asset purchases remaining at the 375 billion level over that course in time.
And our median unemployment is 7.3 percent. Our view in terms of the probabilities is that -- and we’ve provided a probability chart -- is that it’s as likely that we’ll meet that 7 percent threshold by the end of the forecast horizon, as it is -- as it is before.
And let me just -- let me just add one other thing, which I should -- to Faisal’s question earlier -- which is that our view -- so we’re not providing a view in time. We’re providing a view of those underlying conditions. If you take that together and you map that towards where market interest rates are, is -- our best collective judgment is that the current market curve at the time we produced this was less likely to be realized over time, given that outlook for economic conditions.
But this is about an unemployment threshold. Different individuals will have different views on when that’s going to be achieved, and on the basis of forming those opinions, they can infer -- not just infer, they can understand what the bank would do -- will do, rather.
QUESTION: (OFF-MIKE) Bloomberg Television. Governor, there’s been a huge degree of correlation between global -- major global bond markets over the last few years. There’s some evidence that that’s breaking down. Would you expect that to continue to break down? Or do you think that once the Fed starts seriously tapering, tightening, that the gravitational effect will simply be too great for the gilt market to resist?
CARNEY: Well, the first thing is that there’s been a huge degree of correlation, as you know, across all asset prices. You know, risk on, risk off correlations, whether it’s major commodities and the S&P 500, whether it’s credit spreads, whether it’s global bond markets, certain currency pairs, correlations that previously would have been 0.3, 0.25, something like that, all in the 0.75, 0.8 level, and it’s only - - has been in the -- in the first part of this year that those very high correlations, both across asset classes and within asset classes, started to return to something like pre-Lehman level.
That’s a good thing, because that’s -- we’re out of the huge macro tail risk world, where you have the possibility of major events to -- the small probabilities of major, very bad events influencing the course of -- the course of asset prices.
Now, in that -- in that context, between the major advanced economy bond markets, even in a more normal environment, one can expect a relatively high correlation of yields, longer-term yields -- and I’d make the import on longer-term yields -- because these high-quality credits are relatively good substitutes for each other. I think it’s a point that we make in the actual report, in the -- in the tradeoff guidance report.
What is important, though, is that -- to recognize is the different major economies, advanced economies, are at different points in their economic cycle. They have different outlooks for inflation. There will be different stances of monetary policy. There will be different timings that are appropriate of exit, beginnings of exit from exceptionally stimulative monetary policy.
And what we saw a few months ago, in June, was that there was much less differentiation at the shorter end of the curve between the major central -- the major short rate curves than would have been warranted by the different positions that they are in.
That’s one of the advantages of guidance. In this context, it’s giving a better sense, to use the technical term, of the MPC’s reaction function, not a change in the reaction function, but it gives a better sense of the MPC’s reaction function to financial market participants.
BLYTHE: We’re way over time, but a very quick question, Simon?
QUESTION: I’ll be very quick. Simon Nixon, the Wall Street Journal. Governor, there are some (inaudible) economists who are forecasting that house prices might rise by 15 percent in the next year. Would you regard that as a success for this policy?
CARNEY: The success for -- the bank -- the Bank of England judges -- sorry, be more specific -- the MPC judges success in achieving -- by achieving the inflation target, the 2 percent inflation target. That is our primary objective. The issue we face today is the speed with which we return to that 2 percent objective and in a manner that, to the extent possible, supports output and activity. We don’t target asset prices. We focus on CPI inflation and getting there at the right period of time.
Within the broader Bank of England, within the broader set of responsibilities of the Bank of England, there are both prudential regulators, the PRA, macroprudential authorities, the FPC, who take an intense interest in scenarios such as the one you just described and the implications for sustainability, but that’s why there’s that division of responsibility.
QUESTION: Thank you.
BLYTHE: I’m afraid that really is all we’ve got time for, so thank you all very much, indeed, for coming.