Interest rates: ‘No immediate need for rise’, says Carney, as he seeks to reassure over cost of borrowing

 

Mark Carney sought to dampen expectations of an imminent interest rate rise on Thursday night, despite the unemployment rate falling to within a whisker of the level at which the Bank of England said it would consider raising the cost of borrowing.

The Governor, appearing at the World Economic Forum in Davos, Switzerland, told the BBC there was “no immediate need to increase interest rates”, although he confirmed that the case for an increase in the official base rate from its historic low of 0.5 per cent would be formally considered by the Bank’s Monetary Policy Committee next month.

He added that when rates did begin to rise it would be gradual, rather than sudden.

Under the Bank’s policy of forward guidance, the Bank pledged last summer to hold rates constant until the unemployment rate fell to 7 per cent, something it did not anticipate happening until 2016.

But the unexpected strength of the economy since then has driven the unemployment rate down from 7.8 per cent to just 7.1 per cent this week, putting a rate rise in play.

Asked about the inaccuracy of the Bank’s forecasting, the Governor replied: “If our forecast is going to be wrong it’s better to be wrong in that direction.”

There have been suggestions that the Bank will adopt a new, lower threshold, for forward guidance. But Mr Carney said that he was not inclined to focus on just one indicator and that the Bank would be guided by “conditions in the whole labour market”. He also noted official figures which show that despite the sharp drop in the headline jobless rate, many people say they are working fewer hours than they would like to.

In other comments likely to underline his disinclination to put up rates in the near future, Mr Carney pointed to continued signs of stress in financial markets.

“The worst of the crisis is behind us but the financial system is not functioning as well as it could,” he said. “Uncertainty among households and businesses is still preventing investment.” He also noted that the economy, despite being on course for growth of up to 1.8 per cent in the 2013 financial year, was still smaller than it was in the first quarter of 2008.

Adam Posen, who served on the Bank’s Monetary Policy Committee between 2009 and 2012, was also in Davos this week and he urged his former colleagues to keep interest rates on hold. “I would advise the MPC to say we’re inflation targeters and there’s no inflation in sight,” he said, adding “there’s no credibility going to be lost”. 

However, Mr Posen, who had a strongly doveish reputation when he was on the MPC, was sceptical of the value of Mr Carney’s forward guidance in the first place, describing it as “what you do when you’re not doing anything else”. The inflation rate has fallen sharply and now stands at the Bank’s official 2 per cent target for the first time since 2009.

Mr Carney was asked about whether he would be happy for an independent Scotland to use the sterling, something that the Scottish First Minister, Alex Salmond, has called for. The Governor said that it would not be his decision and the central bank would implement whatever Parliament decided.

 

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