Bank of England governor reassures businesses interest rates would remain at low levels amid fears of a new housing bubble
The governor of the Bank of England, Mark Carney, on Friday sought to reassure businesses that interest rates would remain at historically low levels.
Carney told British business leaders in Davos that the Bank was already "starting to put on the brake" amid fears that the recent sharp rise in house prices was the start of a new bubble.
The governor admitted that the recent fall in unemployment would force a re-think of the Bank's forward guidance policy – the pledge not to even discuss raising interest rates from 0.5% until the jobless rate falls to 7%. But he insisted the economy remained well short of achieving "escape velocity" and that the Bank was already using an array of policy tools to control the housing market.
The governor said there would already be upward pressure on interest rates had the Bank's financial policy committee not started to use new powers at its disposal, which include higher underwriting standards for lenders and the withdrawal of incentives for banks to lend to the mortgage market. He added that stress tests planned for later this year would focus on banks' exposure to the mortgage market. "We started by taking our foot off the accelerator," Carney said. "We are now starting to brake a bit."
The governor said he wanted to ensure banks had enough capital to cope with a fall in property prices, and that the use of so-called macro-prudential policy was designed to avoid raising interest rates before the economy was fully recovered.
"We have established a hierarchy," the governor said. "Monetary policy is the last line of defence."
Carney said the Bank's monetary policy committee would look at its forward guidance strategy after the sharper than expected fall in unemployment in recent months before a decision next month. Bank sources made it clear that all options were being considered, including scrapping the scheme entirely.
The governor told the UK business lunch that the Bank was assessing how to "evolve" and "update" guidance but pledged that the degree of stimulus to encourage economic growth would "remain exceptional for some time".
Carney added: "That should help reassure British business that the path of interest rates will be consistent with a sustained recovery – that is, with escape velocity."
He admitted that unemployment had fallen faster than predicted since August when the Bank established forward guidance. "The latest data show that more than a quarter of a million jobs were created in a three-month period – the biggest increase since records began in 1971. As a result, unemployment seems to be falling at a pace that will reach our 7% threshold materially earlier than we had expected."
Many City economists expect unemployment to hit 7% within a couple of months, but Carney said this would not lead to rates being raised from 0.5%, where they have been since early 2009, because inflationary pressures remained weak.
"It now seems likely that the rate of unemployment consistent with stable inflation in the medium term is somewhat lower than the MPC assessed back in August."
Arguing for borrowing costs to remain low, Carney said: "A few quarters of above-trend growth driven by household spending represent a good start, but they aren't sufficient."
Discussing the prospects for permanent exit from the deepest recession of the post-war era, Carney said: "It will take sustained growth, more balanced demand and a recovery in the supply side for advanced economies to break free into a more normal universe."
The governor said there had been encouraging signs, with the UK and the US leading the way among developed countries and the eurozone at last showing signs of life.
"None of this is to suggest that current levels of economic activity are acceptable or that the world economy is no longer under strain. After the Great Moderation and the Great Recession, there are several reasons why it will be years before any superlatives are attached to this recovery."