Bank of England Governor Mark Carney said Wednesday that the UK economy has edged closer to the point at which Bank Rate will need to rise off its emergency 0.5% setting.
“As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which Bank Rate will need gradually to rise,” Carney said at a press conference following the publication of the May Quarterly Inflation Report.
The Governor also said that Bank Rate will remain low compared to its pre-crisis 5% average and said that monetary policy was now considered the “last line of defence” to stem threats to financial stability.
Carney’s stressed the BOE will look to other tools to head off any risks to the stability from the housing market before raising Bank Rate.
Turning to discuss the disinflationary impact of a rising pound, Carney said that the MPC “will largely look through those impacts”, but warned that prolonged strengthening of sterling could harm the balance of the recovery.
Carney said that the recovery will need to broaden and see improved contributions from business investment and an improvement in net exports in order for the economy to continue to expand.
“Expansion will not endure through household spending,” he said.
The BOE Governor said that the changes made since February to the speed at which the amount of spare capacity will be closed were marginal, with the BOE now predicting it will be broadly closed by the end of the three year forecast horizon.
Carney as said the small increases in the BOE’s growth forecasts were marginal.
The BOE Governor also gave colour to the MPC view that there is additional “hidden” slack in the labour market and said that its 1-1.5% estimate of labour slack “is in some respects cautious”.
“That slack is evident in the 1.4 million people who are working part-time because they are unable to find full time work, as well as in an unemployment rate of 6.8% that remains significantly above our estimate of its current equilibrium,” Carney said.
Speaking alongside Carney, Deputy Governor Monetary Policy Charles Bean said that markets and the wider public should not get hung up on precise spare capacity estimates.
The QIR’s inflation forecasts, showing CPI still below the MPC’s 2% target in two and three years’ time, were barely changed from the February projections.
The QIR forecasts show the market expectations that the BOE plugged into its projections, for the first hike not until Q2 2015, are consistent with the MPC keeping inflation close to its target. There are, however, various paths for hitting the target and with Carney saying the first hike has edged closer the debate will continue to rage among analysts over when it will come, with the earliest forecasts for a Q4 2014 hike.