LONDON - Bank of England Governor Mark Carney sought Wednesday to assure homebuyers and businesses that U.K. interest rates won't rise any time soon because the economic recovery is still fragile.
Though headline figures for growth and
unemployment have improved faster than previously predicted, Carney said there
are a number of issues that will mean interest rates have to remain low for a
while to come. The bank's benchmark interest rate has been at a record low
level of 0.5 percent for nearly five years.
He noted that wages and price
pressures remain fairly subdued and that the recovery has not spread equally
through the country -- London and the southeast of England are witnessing a
bigger economic rebound, particularly in the housing market, than say, areas of
"The continuation of significant
headwinds -- both at home and from abroad -- mean that Bank Rate may need to
remain at low levels for some time to come," Carney said as the bank
published its latest quarterly economic projections.
"We're not going to take risks
with this recovery," he added.
Carney's comments were hugely
anticipated in light of a sharper than anticipated fall in U.K. unemployment.
When he took the job last summer, Carney said the bank wouldn't raise interest
rates at least until unemployment had fallen to 7 percent. At 7.1 percent at
last count, an update was needed.
Carney dismissed suggestions that
linking potential policy changes to one indicator was a mistake. He noted that
the "forward guidance" helped to anchor market expectations of the
future path of interest rates that allowed consumers and businesses to spend.
Using the set-piece point of the
quarterly Inflation Report, Carney redefined the bank's guidance to include a
range of parameters. As well as monitoring inflation and wages, he said the
Bank will be closely assessing the spare capacity in the economy -- essentially
a measure at which an economy is operating below a level that may stoke
inflation. In the wake of the 2008 financial crisis and Britain's subsequent
recession and subdued recovery, the Bank estimates that spare capacity to be
around 1 percent to 1.5 percent.
Though Carney said he wants to
eliminate the spare capacity over the Bank's three year forecast horizon,
interest rates would likely rise before then because of the time lags involved -- higher interest rates can take over a year to feed through an economy.
"To that end, it judges that
there is scope for the economy to recover further before Bank Rate is raised
and, even when Bank Rate does rise, it is expected to do so only gradually and
to a level materially below its pre-crisis average of 5 percent," the bank
said it its report.
The main takeaway in the markets
appears to be that interest rates aren't going anywhere soon but that increases
will be on the agenda at some stage over the next couple of years.
Jonathan Loynes, chief European
economist at Capital Economics, said the change in tack has "not altered
our view that the first rate hike will not come until late next year."