The Bank of England may provide more stimulus for Britain’s economy if financial markets get ahead of themselves and threaten to choke off its recovery, its governor said yesterday.
In his first policy speech since taking over the bank, Mark Carney also announced a relaxation of rules for banks which could boost lending and help Britain's "solid but not stellar" emergence from its deep recession.
Financial markets have challenged the BoE’s new plan to keep interest rates on hold for possibly three more years and Mr Carney said the bank could provide more stimulus if premature rate hike expectations added to risks facing the recovery.
“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,” Mr Carney said, adding policy-makers would watch those conditions closely.
“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.”
Investor worries
Sterling initially weakened but recovered its losses against the dollar and expectations that the BoE might have to raise interest rates in 2015, a year earlier than its plan implies, were little changed. British government bond prices fell, pushing up yields further, as investors worried that the new bank rules could lead to sales of gilts.
Mr Carney sought to underscore his message that the BoE's new forward guidance plan – something he deployed while running the Bank of Canada and helped land him the job in London – was not reliant on how financial markets responded.
“Hanging this on markets is to miss the point,” he told reporters after making his speech to business representatives in the city of Nottingham, far from London’s financial hub.
“What my colleagues and what I am hearing across the country is that there is appreciation for that greater degree of certainty that is being provided by the bank.”
The BoE’s interest rates, not market rates, were most important to most households and businesses, Mr Carney said. – (Reuters)
