Governor Mark Carney defended the Bank of England's radical new forward guidance policy today, insisting it has “reinforced the recovery”.
Mr Carney told MPs the new strategy of linking interest rate rises to unemployment has given households and businesses greater "certainty and clarity".
And he told the Treasury Select Committee the Bank remains "vigilant" over a house price bubble, as prices and demand are pumped up by Government stimulus schemes. It could recommend banks set limits on how much households can borrow, he said.
The Bank revealed a new strategy of pinning rate rises to unemployment last month. It will not consider lifting rates from their record 0.5% low until unemployment has dropped to 7%, unless there are fears of a sharp spike in price rises.
The Bank expects this to take around three years, but sterling and the cost of Government borrowing have risen sharply in recent weeks as markets expect the jobless total to fall more sharply.
Mr Carney said: "Overall, my view is that the announcement has reinforced recovery."
He added: "There has been a change in the pace of activity without a question. This is welcome but we should not be satisfied with it."
Under intense questioning by MPs during a two-hour session, the former governor of the Bank of Canada repeatedly stressed that the Bank is firmly tied to its key target of keeping inflation at 2%.
But he said: "I'm not afraid to raise interest rates. I raised interest rates in Canada.
"I have not an issue with doing that if it's appropriate."
Mr Carney said the Bank's new forward guidance message has been well understood by households and business.
"When the economy is really growing, when the economy can withstand a tightening of monetary policy - that's when we will be taking action," he said.
He added while there are encouraging signs from the economy, the Bank could add to its £375 billion quantitative easing programme if Britain suffers a relapse.
Mr Carney, who was flanked by fellow Monetary Policy Committee members Paul Fisher, Ian McCafferty and David Miles, said he has "tremendous sympathy" for savers who continue to be hit by record low rates, and are seeing their nest eggs eroded by inflation.
But he said the Bank's job is to make sure it is not a "false dawn".
"What we are planning to avoid is this stretching into decades as opposed to two to three more years," he said.
David Miles suggested markets have over-reacted to improved output data, which showed the economy growing by 0.7% in the second quarter.
He said: "People may be attaching too much weight to the strong numbers on GDP and thinking unemployment is going to fall back very quickly."
Mr Carney added the Bank is watching the housing market closely as it recovers - but insisted the market pick-up should be seen in context, and remains a third to a quarter below pre-crisis levels.
He said the Bank could take action on loan-to-value rates so there is not a return to 100% mortgages.
Mr Carney was asked by Conservative MP Mark Garnier if a return to normal interest rates will mean "very significant numbers of households may find themselves pushed into quite strained positions".
Mr Carney replied "Yes. There are a number of households who are in effect in a form of being credit strained because of existing debt burdens."
But he said the Bank must set monetary policy "for the UK as a whole", and cannot target policy at specific parts of the population.
He said: "The challenge will be, as the recovery progresses, to gradually transition at an appropriate pace from a situation of emergency stimulus to a gradual withdrawal of that.
"And to ensure that households who are in a position of taking on additional debt are thinking all the way through the horizon."