Carney: interest rates permanently lower

 
Mark Carney

At a lunch for business leaders in Davos, Mark Carney made some remarks which showed that he does not want interest rates to rise for some time yet, even though unemployment is very close to the level where the Bank of England would in theory start to evaluate whether it is time for the cost of money to increase.

The governor of the Bank of England said that the central bank now believes that the unemployment rate consistent with stability in inflation is lower than it believed last summer.

Then it took the view that there might start to be inflationary movements in wages once the unemployment rate fell to 6.5% - which is not to be confused with the 7% threshold for the Bank to start reviewing interest rates as part of its so-called "forward guidance" policy.

Mr Carney said: "It now seems likely that the rate of unemployment consistent with stable inflation in the medium term is somewhat lower than the MPC assessed back in August."

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The persistence of low interest rates for years to come reflects the mountain of debt that was accumulated in the UK during the boom years”

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Although Mr Carney did not say what level of unemployment the Bank now saw as likely to have inflationary consequences, he will be seen as indicating that if he gets his way, the Bank's policy rate will stay at the record low of 0.5% for many months yet.

I say "if he gets his way" because he is only one of the voting members of the Bank's Monetary Policy Committee, or MPC, and I am told that some members are beginning to think it might be wise to start raising interest rates, albeit gently.

The current unemployment rate is 7.1% - and it has been falling sharply through 2013.

Mr Carney also said: "The level of interest rates necessary to sustain low unemployment and price stability will be somewhat lower than before the crisis.

"In the jargon, the equilibrium real interest rate, which has been negative for much of the period since the crisis, will eventually turn positive again, but it is likely to remain well below historical norms."

Defended

The persistence of low interest rates for years to come reflects the mountain of debt that was accumulated in the UK during the boom years - and the fact that non-bank debt in aggregate, namely business, government and household debts, have continued to rise since then.

The former US Treasury Secretary, Larry Summers, has argued recently that for many of the developed economies, real interest rates - interest rates minus the inflation rate - may have to remain negative for many years.

Mr Carney also defended the "forward guidance" policy he introduced in the summer, even though an important element of that guidance, the unemployment threshold, looks set to be breached much earlier than the Bank expected.

He said the Bank's forward guidance had through the autumn given confidence to households and businesses that interest rates would remain low and stable, which had contributed to the current strength of the UK's economic recovery.

Mr Carney said that the Bank would evaluate whether to change elements of its forward guidance in its February Inflation Report.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +1

    Comment number 26.

    If the MPC is to regain some degree of control over possible future changes in inflation, it clearly needs to progressively increase Bank Rate to at least 1.5%. Otherwise, the only way to respond to deflationary threats would be further quantitative easing. The problem is that threats are currently more deflationary than inflationary, so the conditions will not be right for a month or two.

  • rate this
    +3

    Comment number 25.

    The government takes from pensioners by keeping savings rates low but keeps boosting their income by boosting state pensions; keeping universal winter fuel payments and free bus passes. They take with one hand and give back with the other. Youngsters don't vote so get hammered all ways.

  • rate this
    0

    Comment number 24.

    Carney's experience has been in a resource rich effectively developing economy.

    He now finds he is in a over developed economy.

    What makes anyone, including him, think he has the experience to do his job?

    Might as well get me to do it.

    Heck at least I have not got any reputation to protect.

  • rate this
    -1

    Comment number 23.

    If 30% of our national debt is owed to the Bank of England, and the bank is owned by the people like it says it is (it isn't), why can we not make an accounting adjustment between the bank and the treasury?

    The BofE is a private bank with secret shareholders and has been sucking Britain dry since the battle of Waterloo.

    Imagine having shares in a company that prints money!

  • rate this
    +5

    Comment number 22.

    there will be no rise in interest rates until the major banks want it,no matter how many committees they have.

    We will see the full range of excuses for not following the 7% stated but it was only a guideline sort of like an election pledge ... worthless.

  • rate this
    +63

    Comment number 21.

    16. "I fear for many friends who've strectched to borrow with disregard for the difference 1% makes to repayments."

    So why should the rest of us pay for their stupidity of borrowing beyond their means?

  • rate this
    -2

    Comment number 20.

    There will be no savings and no pensions in the UK if he does not IMMEDIATELY reverse his insane policy.

    His advice is: if you have money or assets still in Sterling take them out of the UK NOW.

    The man is an economic buffoon and should NEVER have been hired.

    His advice is: QE is infinite and will never have to be repaid.

    There has never ever been such a mind boggling stupid action.

  • rate this
    +1

    Comment number 19.

    Instead of supporting banks by leaving your dosh in them for naff all return (1% if you're lucky) try peer to peer lending with one of the online providers. You get about 5%, maybe more. And, with some, you get to choose who you lend to.

  • rate this
    +1

    Comment number 18.

    Surely there is a simple solution.. For savers, everyone go to their banks on one day and ask to withdraw their money ? Yes, it brings down the whole system but hey did the borrowers and banks do that 5 years ago ? Maybe now its the savers turn

  • rate this
    +1

    Comment number 17.

    Until the government/BoE on behalf of the taxpayer takes back direct control of the money supply the big private banks will always be the ones dictating when and how much money is created and lent out (and most importantly where to). The simple truth is that banks are lending less to wouldbe homeowners hence less cash in the economy. They aren't lending to small businesses either hence no growth!

  • rate this
    +1

    Comment number 16.

    I fear for many friends who've strectched to borrow with disregard for the difference 1% makes to repayments.
    The banks have protected themselves by demanding large deposits to ensure loan to value ratio.
    But it is a misconception to think deposits protect borrowers.
    Good lending sense involves looking at credit history, salary, rent payments and job security- all factors seemingly demoted.

  • rate this
    -6

    Comment number 15.

    The inevitable result of this cannuks idiocy is the end of Sterling as a currency. He has made it worthless. In under a year he has destroyed the 300 year history of the currency.

    He will have done this for a reason

    The ONLY possible reason to make such a stupid statement can be that the the whole UK banking sector is irretrievably BANKRUPT

    His signal is it is OK to never pay your debts!

  • rate this
    +2

    Comment number 14.

    Looks like his brief is to keep interest rates low until after the election....Is there no one honest in banking ?

  • rate this
    +18

    Comment number 13.

    7.Goves Silly Temper Tantrum
    "Carney is a liar. He promised to increase interest rates as soon as unemployment hit 7%"

    No he didn't. He said he wouldn't *consider* it until unemployment hit 7%.

    Not sure whether your problem is recalling facts, or applying logic. Either way, don't rush to judgement.

  • rate this
    +3

    Comment number 12.

    When I had a mortgage interest rates were in double figures (sometimes up to 16%). Now I have savings I struggle to get 1 or 2% interest. However, my share ISA seems to have made a packet in the last 6 months so perhaps I'll just have to live with the low rates for cash savings.

  • rate this
    +4

    Comment number 11.

    So that's savers STUFFED AGAIN, as Mr,C's extolled Forward Guidance turns out to be yet another flawed economic analysis,which presumably this, & any future govt, will wish to see perpetrated into the foreseeable future? So the strategy becomes bye bye prudence, hello SPEND, SPEND, SPEND, as disillusioned savers withdraw the last of their privately held deposited reserves.

    NICE ONE GUV-!!

  • rate this
    0

    Comment number 10.

    So, is it Carney that decides.. or a committee?

  • rate this
    +5

    Comment number 9.

    Kurgan@3

    If interest rates increases drive an owner family out of their home, that is unacceptable and condemned, but I think that will be infrequent, well I hope so,

    If the rest of the UK is similar to the area in which I live, there many unoccupied houses owned by 'buy to let speculators', for which I will have no sympathy if interest rates rises force a sale at a big loss.

  • rate this
    -1

    Comment number 8.

    The key that drives the rate is govt's debt repayments. Every incremental rise in the base rate whacks Govt borrowing on the gilts they have outstanding, so triple whammy, savers screwed,govt borrowing goes up and then we see more cuts and more taxes etc. 0.5% to 1% possibly for the next decade at least.

  • rate this
    -11

    Comment number 7.

    Carney is a liar.

    He promised to increase interest rates as soon as unemployment hit 7%.

    My savings are now worth nothing. Thanks bankers, thanks a lot :-(

 

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