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Carney defends interest rate guidance as he heaps praise on UK recovery

Bank of England Governor Mark Carney says the UK has the strongest recovery in the developed world as he launched a robust defence of his forward guidance on monetary policy.

Speaking to the Treasury select committee today, Carney came under fire from MPs over major recent changes to unemployment forecasts which affect the threshold for interest rate change decisions.

The Bank of England introduced forward guidance in August to introduce greater clarity over the future path of interest rates.

It said it would not consider increasing rates until unemployment fell below 7 per cent, unless it needed to counter high inflation or threats to stability.

In its quarterly inflation report, published earlier this month, the Bank significantly altered its forecast for when the jobless threshold will be met.

The Bank now predicts a 40 per cent chance of meeting the threshold next year, up from a 25 per cent chance in August.

The shift prompted Carney to reiterate the 7 per cent level was a “threshold not a trigger” for rate rises and strong growth was still needed.

Today, Conservative MP Brooks Newmark asked whether forward guidance was “dead on arrival” while Tory MP Jesse Norman questioned whether it had made monetary policy more unclear.

Responding to Newmark, Carney said: “That is a total failure of logic. The guidance is giving businesses, households, financial market participants and parliamentarians a perspective on the conditions that are necessary in the economy before the monetary policy committee would begin to consider raising interest rates.

“This economy is the strongest major advanced economy in the world. The rate of growth is near 4 per cent, that is not our forecast year on year, but the economy is picking up sharply. Around 60,000 jobs are being created a month and these are high quality private sector jobs and mostly full time. In that context the conversation would be about an immediate tightening of monetary policy and immediate rises in interest rates. That is not the conversation, that’s not market expectation or what businesses expect.

”I’ve met with over 200 businesses and they understand that given the slack in the economy, given the recovery is relatively new, the MPC is not going to pull the rug out from under the recovery just as it gets going. We will move towards that 7 per cent threshold and take stock.”

Labour MP John Mann accused Carney of being “too close” to Chancellor George Osborne and acting like a politician in his praise for the UK economy.

In a wide-ranging session he also questioned whether the UK is building enough homes, criticised RBS’ “shocking” business lending practices and backed new financial policy committee powers to direct banks’ leverage ratio.


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