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Mark Carney, in His Roundabout Way, Says Rates Can Stay Low

Bank of England governor reveals flip side of stricter bank capital rules
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Mark Carney has told you once, now he's telling you again: An interest-rate increase really, really isn't the Bank of England's first weapon against financial stability risks. Or to be more precise, he's sort of telling you again.

Asked at a press conference in London on Tuesday about the impact on interest rates of stricter bank capital requirements, the central bank governor more or less said the name of the game is actually the whizzy new macroprudential tools wielded by the bank's Financial Policy Committee. 

That's the other side of the coin to his remarks to lawmakers last week: the Monetary Policy Committee's next move on interest rates will be up, but it doesn't have to be right now. 

Or as Carney put it: "the more vigilant the FPC is -- or the more effective, is maybe the better way of putting it -- the FPC is, the greater confidence the MPC can take that it doesn't have to use monetary policy to address financial-stability risk."

He was speaking after the bank published the results of its annual stress test of U.K. banks and its semi-annual Financial Stability Report. The message is that British lenders are within shouting distance of having all the capital needed for officials to consider the financial system safe, though there's still a little way to go.

Here's one reason for continued vigilance: consumer credit is rising at the fastest pace in a decade, according to BOE data published Monday.

So Carney said Tuesday that one measure still to come is a gradual increase in the so-called countercyclical capital buffer, which is a pool banks can run down to preserve lending levels when the going gets tough in the rest of the economy. 

But it's the Bank of England we're talking about, so there were always going to be questions at the press conference on what it all means for monetary policy; all the more so because in the U.K. the question now isn't whether interest rates will increase, but when. Here's another part of the governor's (very lengthy) response:

 "By using macroprudential tools of a variety of sorts, including the countercyclical buffer, we do increase resilience in the system -- and we make it less likely -- we make the system more resilient to the manifestation of any of those risks, whether they come in the medium-term or beyond, and that allows monetary policy to do its job, which is to achieve the inflation target."

With inflation currently around zero (compared with the BOE's 2 percent goal), the MPC has every reason to want to keep rates low.

Recent policy decisions show all but one of the nine-member committee are of that view, economists see the benchmark rate staying at 0.5 percent until the second quarter of 2016, and investors aren't fully pricing in a move until 2017.

"Signalling of macro-prudential action supports a ‘lower for longer’ view" on rates, said Martin Beck, an economist at Oxford Economics. The possible move on the CCB creates "another reason, to add to a long list, supporting our view that bank rate will see no rise until the end of next year."

Carney could have just come out and said it today. We wouldn't have minded. 

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