The new governor of the Bank of England tells a business audience that interest rates are unlikely to rise in the next few years, but action could be taken to prevent a house price boom.
In his first speech as governor, Mr Carney told business people in Nottingham that interest rates would remain at record lows for at least three years, with the Bank of England prepared to pump more money into the economy, through quantitative easing, if this was necessary.
He also said that banks and building societies would be able to reduce the amount of cash they are forced to hold in reserve once they have built up their balance sheets, which should boost lending.
Mr Carney said: “Rates won’t go up until jobs and incomes are really growing. The knowledge that interest rates will stay low until the recovery is well established should give greater confidence to households to spend responsibly and businesses to invest wisely.”
The governor’s first major act after his appointment was to issue forward guidance on interest rates, a repeat of the policy he pursued when he was in charge of Canada’s central bank.
His message earlier this month was meant to signal that base rate would remain at 0.5 per cent for several years, in an attempt to offer certainty to businesses and households.
But City traders picked up on caveats in the announcement which could in theory result in bank rate rising faster than Mark Carney hopes.
In his speech in Nottingham, Mr Carney tried to reassure businesses that the era of low interest rates has years to run.
The forward guidance from the Bank of England’s monetary policy committee (MPC) says base rate will not rise until unemployment falls to 7 per cent (it is currently 7.8 per cent), which is not expected to happen until 2016.
Many in the City expect quicker progress than that, but Mr Carney said: “We do not intend even to consider raising it before unemployment falls to 7 per cent.” This was a point he made in an interview with Channel 4 News on 7 August.
He said the Bank of England was “acutely aware” of the risk of another housing market bubble and vowed to take action if needed. This could mean lenders being asked to restrict borrowing terms.
The governor said Britain’s economy was recovering in a way that was “more measured than rapid”, and there could be “bumps in the road ahead”.