Bank of England Deputy Governor Charlie Bean said the U.K. economy still has not fully recovered, supporting the case for loose monetary policy.
“There is still a long way to go before we can say the economy is mended,” Bean said in a speech in London today. “Until that is the case, monetary policy will need to remain supportive and the guidance we issued in August was intended to make that clear.”
Governor Mark Carney’s forward guidance says officials won’t consider raising the key interest rate until unemployment reaches a 7 percent threshold, something the central bank doesn’t see happening until 2016. Bean said that the framework isn’t a trigger and instead will prompt the Monetary Policy Committee to undertake a “broad assessment” of the economy.
“As a breach of the threshold becomes imminent, it seems likely that the committee will wish to provide further guidance on the future determinants of policy in order to reduce any uncertainty surrounding our reaction function,” Bean said.
He also said that if there is still a “substantial degree” of slack in the economy that can be absorbed without threatening the 2 percent inflation target, then “there will be scope to maintain the existing stance of monetary policy longer, perhaps re-setting the unemployment threshold to a new lower level at the same time.”
Of the three so-called knockouts to guidance, the caveat delegated to the central bank’s Financial Policy Committee may become “material” amid concerns that a house-price bubble is brewing, Bean said. He added that mortgage approvals are still below their average before the financial crisis, and growth in house prices outside of the capital is still “quite modest.”
“We appear to be still some way off seeing an unsustainable house-price boom on the back of excessive credit growth,” he said. “That said, neither the MPC nor the FPC can afford to be complacent.”