Bank of England Governor Mark Carney said there’s plenty of spare capacity in the U.K. labor market as he repeated that officials won’t rush to raise interest rates even if the jobless rate reaches their 7 percent threshold.
“There’s a lot of slack,” Carney told lawmakers of Parliament’s Treasury Committee in London today. “The good news is, because we’re having the recovery, that slack starts to be taken up,” though 7 percent is a “threshold” and not a trigger for a rate increase, he said.
The Monetary Policy Committee agreed this month that record-low borrowing costs may be needed even after unemployment falls to the threshold set under forward guidance. Carney said today there is no confusion among businesses he has spoken with about guidance, and they don’t expect an immediate tightening.
“What guidance is doing is giving businesses, households, financial-market participants, parliamentarians perspective on the conditions that are necessary to exist in the economy before the MPC would begin to consider adjusting monetary policy,” Carney said. “It’s always been about this fundamental question of once the recovery gets going what happens to productivity.”
He said it’s understood that “given that the recovery is relatively new, what the MPC is not going to do is to pull the rug out from under the recovery just as it gets going.”
One part of the hearing was marked by a bristly exchange between Carney and Treasury Committee member John Mann when the lawmaker asked whether the governor was acting like a politician by trying to “present a rosier picture” of the economy by selectively choosing data. In response, Carney said he was “more than mildly offended.”
Under guidance, the MPC has said it won’t consider raising its key rate from 0.5 percent at least until joblessness hits 7 percent from its current level of 7.6 percent. In forecasts on Nov. 13, based on no change to the rate, it saw that threshold being reached at the end of next year. Carney said the same day that the recovery has “finally taken hold.”
Deputy Governor Charlie Bean, speaking alongside Carney today, said as the unemployment rate nears the threshold, the MPC may begin to give indications of its next likely step, and that this could even include a reassessment of guidance.
If a rate increase isn’t the right option for the MPC at that time, it would be “perfectly possible to issue new guidance that, say, they expect to be able to maintain it until 6.5 percent,” Bean said.
“We will have learned quite a lot over the journey to 7 percent,” he said. “I would expect, as the committee gets close to threshold, it will feel in a better position to give some indication about what is likely to happen next.”
Carney also raised questions about the reliability of some data from the Office for National Statistics, particularly investment, saying he doesn’t put “full weight” on the numbers.
“It doesn’t entirely feel right that investment, as measured, is falling at a time when we see strengthening investment intentions,” he said. He added he “was much more comfortable” with the official data produced in Canada when he was the governor of the central bank there.