Bank of England Governor Mark Carney says he wants to get the message across to business that rate hikes will be “limited and gradual” because higher business investment is crucial for a sustainable recovery.
In an interview on the BBC’s Andrew Marr show Carney said it was very difficult for net exports to rise, with the euro area weak and sterling strong. With the first part of the recovery consumer-led, it is going to be up to business investment to drive the next stage.
“The key to this recovery sustaining itself is going to be around business investment,” Carney said.
The need for strong investment is “part of the reason why we are trying to provide as much clarity to business that the path of monetary policy, the path of interest rates is going to be calibrated very carefully,” he added.
So far it has been a consumer-led recovery as “households across Britain have started to draw down on extreme levels of precautionary savings and spend a bit more,” Carney said.
With consumption already growing and government spending constrained by public-sector balance sheet repair, within the growth equation that leaves only net exports and investment to drive the recovery further.
“Now it is going to be very difficult on the net exports side. Europe is still weak, sterling is stronger. It is going to take some time,” Carney said.
The BOE Governor drove home the message that no rate hike is imminent and he noted that the central bank’s forecasts show that if Bank Rate only rises to around 2% in three years’ time, from its current 0.5%, inflation will still come in just below target.
Rates will only go up “when we see sustainable growth in jobs, in incomes and in spending,” Carney said.
The Monetary Policy Committee wants to see the slack in the economy disappear but its February Quarterly Inflation Report showed that spare capacity was still present in three years on the market interest rate projection.
“We want to use up all that spare capacity and (on the market rate forecast) inflation itself is a little below target. So it gives you a bit of a sense (on the rate path),” Carney said.
The BOE Governor also downplayed the likelihood of Bank Rate returning to pre-crisis levels, even in the medium-to-longer term.
“What we are saying is that there are some very big forces that are operating now and will persist – weakness in Europe, repair of public balance sheets, the finishing-off of the repairing the financial system – all of those forces conspire collectively to keep that level of interest rates down.”
“And people should understand that and that is what we have tried to convey,” Carney said.
On other topics, Carney downplayed talk of a housing market boom, saying the market was recovering from very low levels and transactions were still below long-run averages.
He also hit back against media reports that he wanted the Treasury to amend its Help to Buy scheme, which partially subsidises very high loan-to-value mortgages. Carney had been reported to want to exempt upper-end mortgages from the scheme.
Carney said the Help to Buy scheme was “still pretty small, it is all outside of London, it is for lower priced houses as a whole and it is mainly for first-time buyers.”
“It is not driving the housing market. But we have a responsibility to watch it and we will,” Carney said.
Asked about surging London house prices, Carney noted that much of the top-end of the London market is driven by cash buyers and the MPC can do nothing to influence that.