The Bank of England's Governor, Mark Carney, defended his flagship forward guidance policy yesterday and said the Bank's job was to prevent the recovery turning into another "false dawn".
Since the Bank pledged a month ago to hold down interest rates at 0.5 per cent until 2016, financial markets have reacted with apparent scepticism, with traders bringing forward their expected date for the next rate rise to early 2015 or even late 2014.
But giving testimony to the Commons Treasury Select Committee, Mr Carney denied forward guidance had been ineffective, pointing to its influence beyond the City of London. "My experience in talking to businesses, our experience in terms of surveys of household expectations have been that the message has been understood," he said. The Canadian rebutted the suggestions by MPs that the policy was difficult to understand and said that forward guidance was supporting growth. "By making policy more effective, we make it more stimulative and reinforce the recovery," he added.
Traders have priced in a more rapid interest rate rise partly in response to economic surveys pointing to accelerating GDP growth in the third quarter of 2013. Mr Carney told the committee recent signs of a more rapid recovery were welcome but said that "we shouldn't be satisfied", pointing out that the economy was still below its output levels of five years ago. "Our job is to make sure it is not another false dawn that we saw a few years earlier, and to make sure that as soon as possible this economy reaches a form of sustained velocity", he said.
Mr Carney also repeated his pledge that if the recovery falters the Bank would consider injecting more monetary stimulus.
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