Mark Carney says forward guidance should boost economy

 
Mark Carney Mr Carney took over as Bank of England governor in July

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New Bank of England Governor Mark Carney has said that his new regime should boost the UK's economic growth.

He told the BBC that keeping interest rates at the current level until unemployment fell below 7% was expected to boost the economy by "more than half a percentage point of GDP".

But he warned that this prediction should be taken "with a grain of salt".

He also told the Today programme it was "striking" that there were no women on the Monetary Policy Committee (MPC).

The MPC is the committee at the Bank of England responsible for setting interest rates.

Mr Carney said that while he was not responsible for appointing members of the MPC, it was important to "grow top female economists all the way through the ranks", so there would be more female candidates for MPC positions and qualified candidates to be a future governor.

Mr Carney has taken up his position as more and more data on the UK economy shows it is picking up steam.

On Thursday, the Organisation for Economic Co-operation and Development (OECD) said the recovery was "firming" in June.

Recent figures have shown activity in manufacturing, services, construction and the housing sectors all gathering pace.

On Wednesday, the Bank of England revised its forecast for economic growth this year up from 1.2% to 1.4% and for next year from 1.7% to 2.5%.

'Considerable number'

On Wednesday, Mr Carney gave his first news conference since taking over at the Bank of England, setting out his new regime of forward guidance.

Under this system, the MPC will not consider raising interest rates until the unemployment rate falls below 7%, which he predicted would take about three years and the creation of 750,000 jobs.

There are get-out clauses in this policy if there are threats to financial stability or a danger of inflation getting out of control.

Mr Carney said that Bank of England economic models had assessed the differences between what would happen with current market interest rates without the forward guidance and "what would happen if interest rates stayed at the same level until effectively that [7%] unemployment threshold was reached about three years from now".

"It's more than half a percentage point of GDP... which is a considerable number," he said.

He added that "as with any economic prediction you have to have some humility so take all of this with a grain of salt".

The US Federal Reserve and the European Central Bank have already provided forward guidance on their interest rate policies.

Prime Minister David Cameron was asked on BBC Breakfast where he thought the extra 750,000 jobs would come from.

"We have seen the creation of 1.3 million new private sector jobs over the last three years and they're going to come from the private sector," he said.

"We need to encourage small businesses to take people on. We need to, as we are, back apprenticeship schemes and things like that, so I'm confident the jobs will be there."

'Socially useless'

Mr Carney also stressed the importance of banks lending to businesses and creating jobs.

"The focus [of a bank] has to be on the real economy - what it does for businesses making investments, what ultimately it means for jobs in the economy, and it's the loss of that focus… that becomes socially useless."

Asked about financial institutions selling products to people who did not need them, Mr Carney stressed that such behaviour would be in the remit of the financial conduct authority.

But he added: "It's that attitude in institutions that undercuts their effectiveness, is bad for the system and to the extent that, with our powers we can… we'll work to snuff them out."

 

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  • rate this
    +15

    Comment number 298.

    Now its the governments turn do away with zero hours contracts increase the minimum wage to a living wage reexamine government contracts and make sure all contractors are paying a living wage and think about giving tax relief on rent so those working do not need state help

  • rate this
    +10

    Comment number 168.

    Do you think Carny will include the million people on 0 hour contracts when he calculates any future decisions? This could be a false boom rather than a real recovery, we are still borrowing and people are simply underemployed.

  • rate this
    +7

    Comment number 134.

    I really do think that in order for us to return to growth and do it in a manner that will benefit us all not just the city of London and make it long lasting is for Mark Carney and the BOE board and the FTSE top 100 COE's to do a tour of the UK, visiting both the city and the rural areas both rich and poor, because he is Canadian he my be able to read a balance sheet but not the country.

  • rate this
    +7

    Comment number 133.

    The only growth we'll see in the UK under Carney will be in the financial sector. As for the working and middle class what we can expect is a freeze in wages and our debts to get bigger.

  • rate this
    +2

    Comment number 128.

    Forward guidance is fine, but any policy will need to be "signed off" by the politicians.
    So any policy will now be driven by politics rather than economics.
    With the politicians in the driving seat, then a further devaluation in Sterling, and a hike in inflation target will be impossible for the Treasury to resist.

 

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