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Bank of England governor reiterates pledge on low interest rates Bank of England governor reiterates pledge on low interest rates
(about 4 hours later)
Mark Carney, the governor of the Bank of England, has used his first major speech to press home his determination to keep interest rates at their record lows until the "fledgling" economic recovery is secured. Mark Carney, the governor of the Bank of England, sought to convince a sceptical City that borrowing costs will remain on hold for the next three years on Wednesday, as he warned that Britain needs a prolonged period of low interest rates to make up the ground lost during the recession.
Speaking to business leaders in Nottingham, Carney left the door ajar to a fresh round of quantitative easing (QE) if financial market turmoil threatens to choke off growth. "The Bank of England's task now is to secure the fledgling recovery, to allow it to develop into a period of sustained and robust growth," he said. In his first big speech since taking charge in July, Carney left the door open for fresh stimulus measures if adverse market reaction to the Bank's new forward guidance regime threatened the UK's "fledgling recovery".
Carney also announced a £90bn loosening of liquidity requirements on banks, in a bid to free up lending to businesses and consumers. The governor said he was trying to provide certainty to businesses and households that the recent signs of growth would not be followed swiftly by a tightening of policy.
Noting that the UK has endured its weakest recovery on record, Carney said: "The real cost of this poor performance is that around a million more people are unemployed than before the recession. "We have a recovery that's just beginning. It's a very long way back. We are lagging just about everybody else in the advanced world. There's a lot of spare capacity", Carney said in a press conference following his speech to business leaders in Nottingham.
"Capacity has lain idle in firms and opportunities have gone wanting for lack of finance and confidence. It will take a period of robust growth to begin to reduce meaningfully this spare capacity in the labour market and in companies." The City was left unimpressed by the renewed commitment to leave interest rates at their record low of 0.5% and to maintain the level of assets purchased under the Bank's quantitative easing programme at £375bn. Sterling jumped by half a cent against the dollar after he spoke, while yields on 10 year gilts rose from 2.73% before his speech, to 2.8% afterwards – the opposite direction to the move Carney might have hoped for.
Since the MPC adopted its new policy of forward guidance last month, pledging to leave rates unchanged at 0.5% until the unemployment rate drops below 7%, from 7.8% currently, investors have actually brought forward their expectations of a rise, amid strong data in the UK, and fears about the knock-on effects if the US Federal Reserve phases out its own $85bn-a-month programme of QE. Traders believe that the pick-up in economic activity will strengthen over the coming months and that the unemployment rate will fall to 7% – the threshold at which Carney might raise interest rates - well before the 2016 date pencilled in by the Bank.
But the new governor sought to dismiss each of the markets' concerns in turn, insisting that unemployment is unlikely to fall to the 7% threshold faster than the Bank expects; that even if it does, the MPC might decide against a rate rise if the recovery remains weak; and that the Bank will not be swayed by decisions made thousands of miles away in Washington. The governor's announcement on Wednesday that banks would be able to reduce their holdings of liquid assets by £90bn, thereby making it easier for them to lend, strengthened the belief that Threadneedle Street was being too pessimistic about growth prospects.
But Carney insisted that the 7% jobless rate was a "staging post", which would not necessarily lead to borrowing costs going up but only require the nine-strong monetary policy committee to re-think its approach. The jobless rate stands at 7.8% currently.
He said the Bank's task was "to secure the fledgling recovery, to allow it to develop into a period of sustained and robust growth. We aim to get there in part by reducing the uncertainty that has held back growth."
Since the MPC adopted its new policy of forward guidance in July, investors have brought forward their expectations of a rate rise, amid strong economic data for the UK, and fears about the knock-on effects if the US Federal Reserve phases out its own $85bn(£55bn)-a-month programme of QE.
But the new governor insisted the Bank will not be swayed by decisions made thousands of miles away in Washington.
"While much has been made of the special relationship between the US and UK, it is not so special that the possibility of a reduction in the pace of additional stimulus in the US warrants a current reduction in the degree of monetary stimulus in the UK," he said."While much has been made of the special relationship between the US and UK, it is not so special that the possibility of a reduction in the pace of additional stimulus in the US warrants a current reduction in the degree of monetary stimulus in the UK," he said.
Instead, he added that the MPC stood ready to offset the shift in financial markets with a new round of stimulus if it threatens the nascent recovery by pushing up borrowing costs. City analysts said, however, that the speech lacked details of how exactly Carney and his colleagues will respond if the current market reaction persists.
"The upward move in market expectations of where Bank rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy. The MPC will be watching those conditions closely. If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further." "If market rates are at 'unwarranted' levels and rise further, putting recovery in the real economy at risk, what would the BoE do?", said Ross Walker, UK economist at Royal Bank of Scotland.
George Osborne has handed back the responsibility of supervising Britain's banks to the Bank of England, through its new arm, the Prudential Regulation Authority, and Carney explained how he planned to use these new powers to underpin the recovery. Simon Wells, of HSBC, said: "There was little attempt to talk the market down with threats of imminent easing. Even if Mr Carney is personally irritated or concerned by the rise in market rates, he probably knows that there is little chance of garnering a majority on the MPC for policy loosening at this stage".
"Confidence that interest rates will stay low is a necessary step to securing the recovery, but it is not sufficient. The UK also needs a fit and healthy financial sector," he said. Carney did explain how he plans to use the Bank's new powers to supervise Britain's banks, in order to underpin recovery. He confirmed that once individual banks have increased their capital levels to the new minimum level of 7% of their risk-weighted assets, the Prudential Regulatory Authority will relax liquidity rules, allowing them to hold less of their capital in the form of the most liquid instruments such as government bonds. In total, the Bank says the move could free up £90bn for new lending.
He rejected outright bank lobbyists' claims that forcing financial institutions to build up more capital would constrain lending to the real economy, arguing that "the reality is the opposite: where capital has been rebuilt and balance sheets repaired, banking systems and economies have prospered." The governor also addressed fears that the government's various schemes to rekindle the housing market, coupled with the Bank's promise to keep rates low, risked stoking a new speculative bubble. He said there was little evidence of a boom, with mortgage approvals running at just over half their pre-crisis level, and debt servicing costs low.
However, he confirmed that, as the Bank's financial policy committee recommended in June, once individual banks have increased their capital levels to the new minimum threshold – 7% of their risk-weighted assets – liquidity rules will be relaxed.
That means they will be allowed to hold less of their capital in the form of the most liquid instruments such as government bonds. In total, across the eight main lenders, the Bank said the move would free up £90bn, which could be lent out, instead of sitting idly on banks' balance sheets. "Taken together, our actions create not just a more resilient system, but also one more able to support and sustain a recovery by serving the real economy."
Carney also addressed fears that the government's various schemes to rekindle the housing market, coupled with the Bank's promise to keep rates low, risked stoking a new speculative bubble. He said there was little evidence of a boom, with mortgage approvals running at just over half their pre-crisis level, and debt servicing costs low.
But he added that the Bank was "acutely aware of the risk of unsustainable credit and house price growth and will be monitoring it closely".But he added that the Bank was "acutely aware of the risk of unsustainable credit and house price growth and will be monitoring it closely".
If policymakers become concerned about an unsustainable surge in house prices, or credit growth, he said they could use new "macroprudential tools", such as forcing banks to tighten lending requirements, instead of just pushing up the Bank rate.