Forward Guidance: BoE's Carney Defends Policy
The governor of the Bank of England has defended giving "forward guidance" on UK monetary policy, saying it will help secure the scale and duration of economic recovery.
In a highly anticipated first public speech since taking the role, Mark Carney set out to reassure the City on the wisdom of his move to keep the base rate of interest at its current record low of 0.5% until unemployment falls to 7% or below.
He told an audience of business leaders in Nottingham: "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 guidance, set out earlier this month, also contained a series of caveats that caught investors by surprise.
It prompted fears that the base rate might rise sooner than expected, sending bond yields up and share prices lower.
But Mr Carney said: "We do not intend even to consider raising it before unemployment falls to 7%."
He also unveiled new plans to bolster bank lending by another £90bn.
Facing mounting criticism over stringent demands for lenders to bolster their financial reserves, Mr Carney said all banks and building societies that meet new capital requirements would be allowed to reduce asset holdings elsewhere on their balance sheets.
This would, the governor said, reduce holdings by £90bn once all eight major banks and building societies met the capital rules.
"That will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy," he insisted.
Mr Carney reiterated assurances he had previously given Sky News about the housing market recovery, saying that policymakers were "acutely aware" of the risk of another price bubble and he vowed to step in and take action to rein in Britain's resurgent property market if needed.
He said lenders could be asked to restrict borrowing terms or even be forced to hold more cash on their balance sheets to dampen down an overheated property market, which some fear is beginning to emerge as a result of schemes such as Help To Buy and improved credit conditions alongside low mortgage rates.
Simon Walker, director general of the Institute of Directors said: "The Governor's speech was detailed, measured and, most of all, it was reassuring.
"Businesses will take comfort from his commitment to low interest rates and his confidence in the nature of the economic recovery."