Rates pressure might trigger more stimulus: Carney
By David Milliken, ReutersNOTTINGHAM, England--The Bank of England (BOE) may pump more money into Britain's economy if financial markets get ahead of themselves and threaten to choke off its recovery, its governor said on Wednesday.
August 29, 2013, 12:22 am TWN
In his first speech since taking over the central bank, Mark Carney said the recovery was broad-based and looked set to continue.
But he stressed that unemployment would not fall quickly to the level at which the BOE would consider raising interest rates under its new forward-guidance plan announced this month.
Financial markets have priced in a first BOE rate hike in mid-2015, much sooner than suggested by the central bank's forecast that unemployment is only likely to reach its threshold level of 7 percent in late 2016, down from 7.8 percent now.
“The upward move in market expectations of where Bank Rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy. The MPC will be watching those conditions closely,” Carney said.
“If they tighten, and 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.”
The Bank of England spent 375 billion pounds ($582.73 billion) on government bonds between 2009 and last year to try to steer Britain's economy out of the stagnation in the wake of the financial crisis.
Most of the bank's nine top policymakers are opposed to a revival of the bond-buying program since late last year although it was supported by Carney's predecessor Mervyn King.
Carney said the option of further stimulus was part of the so-called forward guidance plan which was announced by the BOE earlier this month and mentioned the possibility of further asset purchases.
Carney made forward guidance a hallmark of his time running the Bank of Canada.
But he faces the challenge of persuading British investors, businesses and households that the BOE can keep its foot on the stimulus pedal for another three years without pushing up the country's already above-target inflation.
That challenge was made all the greater after differences of opinion emerged among the bank's top policymakers.
Martin Weale voted against the forward guidance plan earlier this month and since then he has voiced concern that it risks fuelling inflation.