Bank of England Governor Mark Carney today warned against “choking off” the UK’s recovery by raising interest rates too quickly.
In his first public speech since taking the job in July, the Canadian warned of “bumps in the road” ahead as the economic recovery gathers momentum.
But he said the squeeze on households from high inflation was set to fall back and “it would not make sense to choke off the recovery by raising interest rates prematurely”.
He also announced a new potential boost to high street lending to families and small businesses, cutting by £90 billion the “safety buffers” required to be held by the UK’s eight biggest banks and building societies.
He said: “Every pound currently held in liquid assets is a pound that could be lent to the real economy.”
He added: “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.”
His speech comes against a backdrop of growing momentum behind the economy with faster than expected growth between April and June and the biggest rise in house prices since 2006.
But Mr Carney was also forced to defend his new flagship policy of “forward guidance” on interest rates unveiled earlier this month.
The new approach means the Bank will not even consider raising interest rates until unemployment - currently 7.8 per cent - falls to 7 per cent.
The Bank believes this will not happen before 2016, but financial markets believe Carney could be forced to act sooner as the economy strengthens and are pricing in a first interest rate rise in March 2015.
The Governor warned that the recovery would not necessarily result in rapidly falling dole queues and added that the “the UK is no more productive than it was back in 2005 – before Jake Bugg got his first guitar”.
He expressed “tremendous sympathy” with savers hit by more than four years of record low interest rates.
But he added that “what savers need is a strong economy and hinted that the Bank was ready to expand its £375 billion money printing programme to spur on growth if necessary. “If.. 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,” he said.