Bank of England Governor Mark Carney said impediments to the economic recovery that are keeping U.K. interest rates at a record low will persist and borrowing costs won’t rise until the labor-market slack is reduced.
“There are some very big forces that are operating now and will persist,” Carney said in a BBC television interview broadcast yesterday. He cited economic weakness in Europe, repair of public balance sheets and improvements to the financial system. “All of those forces conspire collectively to keep that level of interest rates down.”
While the BOE raised its growth forecasts for Britain last week, Carney has underscored his pledge to keep the bank rate at 0.5 percent “for some time,” in a recasting of his forward guidance to help use up spare capacity in the labor force. Interest-rate increases will be “limited and gradual” and won’t happen until the economy is strong enough to withstand them, he said.
“It means that we can responsibly take our time and only adjust interest rates once more of that slack is used up,” he told the BBC. “The path of monetary policy, the path of interest rates, is going to be calibrated very carefully to ensure that only when we see sustainable growth in jobs, in incomes and in spending will we make adjustments.”
Under Carney’s plan, policy makers said in August they won’t consider raising their benchmark interest rate until unemployment falls to at least 7 percent. The improving economy has meant the jobless rate falling faster than they originally forecast. It declined to 7.1 percent in the three months through November, even as inflation cooled to the BOE’s 2 percent target in December, for the first time in more than four years.
The central bank said in its quarterly forecasts on Feb. 12 that data will show unemployment probably fell to the threshold level in the quarter through January. BOE officials also estimated the output gap at 1 percent to 1.5 percent of gross domestic product and provided details on the factors that will influence their decisions after the threshold is crossed.
“What we haven’t seen yet is business investment picking up and we certainly haven’t really seen net exports recovering,” Carney told the BBC. “It’s going to be very difficult on that export side. Europe is still weak, sterling is stronger, so the key to this recovery -- sustaining this recovery -- is going to be around business investment.”
The governor said the central bank’s projections published last week showed economic slack persisting and consumer-price rises below the BOE’s goal if it incorporates investors’ expectation that the key rate is raised to 2 percent in three years’ time.
“We actually have a situation where we don’t use up all that spare capacity, all the extra capacity in the labor market, which is one of our objectives,” he said. “We want to use up all that spare capacity, and inflation itself is a little below target, so it gives you a bit of a sense.”
U.K. employment growth is set to slow, according to a report published today by the Chartered Institute of Personnel and Development. An index of companies’ recruitment intentions fell to 16 from 24, the CIPD said, citing a quarterly survey by YouGov Plc of 935 human resources professionals and employers.
The better economic outlook and government incentives have also bolstered the housing market, with mortgage approvals rising to their highest level in almost six years in December. That has prompted the BOE to curtail support for home loans in its credit-boosting Funding for Lending Scheme and Carney said BOE officials will watch out for signs of overheating.
“What we’ve seen in the housing market is an adjustment from very low levels,” with transactions still 25 percent below historic averages, Carney said. On the government’s Help to Buy program, he said policy makers “have a responsibility to watch it and we will speak out if we are concerned.”
On bank bonuses, he said there should be greater deferral of compensation and lenders should have the power to claw back payments if the individual’s decisions result in poorly understood risks materializing, or if there are conduct issues.
“It should be deferred for a very long time and there should be the ability, and in fact we have the expectation, that the firm will take back that compensation,” Carney said.
New rules will also mean the ability of lenders to pay bonuses is restricted if their capital levels start to reduce, he said. “That will start to have real teeth as time goes on,” Carney said.