Bank of England Governor Mark Carney said a new phase of forward guidance is intended to give assurance that officials will support the economic rebound.
“We will not take risks with the recovery,” Carney said in an interview with Australian newspapers published yesterday. “We are going to set the path of monetary policy in a way that ensures that we see sustainable growth in jobs and incomes and in spending.”
Carney said the revised framework for forward guidance that he introduced earlier this month reflects the necessity for a “more complex set of judgments” than was needed in the first phase, where there was a link to the unemployment rate. The bank changed its approach after the jobless rate fell faster than officials had forecast toward the 7 percent threshold for considering an interest-rate increase.
“We’ve made it through the easy phase of guidance, which is to say what we would not do,” Carney, 48, said on the sidelines of the Group of 20 meeting of finance ministers and central bankers in Sydney. “Now it becomes a question of what will we do, and how and under what criteria, as the economy continues to recover.”
The comments follow remarks by Carney’s colleagues on the Monetary Policy Committee on when rates may be increased from a record-low 0.5 percent. Martin Weale said Feb. 20 that it may come in the spring of 2015, while Chief Economist Spencer Dale said the previous week that investors’ bets on an increase next year and a 2 percent rate by 2016 “are reasonable.”
“What we need to make judgments about is how much slack there is in the economy, and there’s a fair bit of uncertainty about that,” Carney said in a separate interview on Australian Broadcasting Corp. “We’re communicating that we’re in no rush at this stage.”
He also said policy makers want to see a pickup in investment, though weakness in the euro-area economy may remain a drag on growth.
“We need to see business put investment to work, and that’s tough,” he said. “It’s a tough global environment, as you know, it’s tougher when you’re sitting next to Europe which is still growing modestly.”
Ben Broadbent, an external member of the MPC, wrote in the Sunday Times newspaper yesterday that guidance is intended to ensure that the recovery isn’t “derailed” by unwarranted expectations of an interest-rate increase.
“I do not want to put a date on when bank rate might rise,” he said. “When it does, the rise is likely to be gradual and limited.”
Broadbent said there are “clear signs” that business investment is recovering, and that “it’s reasonable to expect the recovery to be accompanied by renewed growth in productivity.”
Carney, whose remit also includes oversight of the U.K. financial industry, said officials must insist on rules that shield taxpayers from risks posed by banks. The interview was conducted jointly by the Australian Financial Review, The Age, and Sydney Morning Herald newspapers, and ABC television.
Before the crisis, banks “carried basically no liquidity protection and they were reliant on the state to insure” their activities, he said. “We can’t have a system where some of those institutions that are pushing back on this are still reliant ultimately on the state and getting a massive subsidy from the taxpayer.”
Higher capital requirements aren’t adequate, Carney said. The world’s biggest banks must also be backed by bondholders whose stake would turn to equity if an institution needed to be recapitalized.
“It means the bondholders actually pay attention to what the banks are doing,” he said. “Into the crisis and quite frankly throughout the crisis, the lesson has been that the bondholders have a free ride, because basically they own government debt.”