Carney puts test of UK recovery on business
Bank of England Governor, Mark Carney, has said that business will have to be at the forefront of the country's economic recovery, not the consumer
3:51PM GMT 16 Feb 2014
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Britain must see a business recovery before interest rates can begin to rise, according to Mark Carney, the Governor of the Bank of England.
Mr Carney said the country had enjoyed a “consumer-led recovery” but that businesses must begin investing at a much greater rate for him to be convinced the time is right to raise rates.
“The key to this recovery sustaining itself is going to be around business investment,” said Mr Carney in an interview on the BBC’s Andrew Marr Show.
He added: “It’s part of the reason why we’re 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 to ensure that only when we see sustainable growth in jobs, in incomes and in spending will we make adjustments.”
Mr Carney signalled bonus rules could become tougher with time and said any payouts should be “deferred for a very long time”, but he refused to be drawn on the subject of Barclays’s decision last week to increase staff awards despite a fall in profits.
“Their [banks] ability to pay bonuses is restricted if their capital levels start to reduce…these are new rules and these are hardwired. Particularly the last one is hardwired into the capital system and that will start to have real teeth as time goes on,” he said.
Last week, the Bank of England signalled that rates were unlikely to rise before 2015 as Mr Carney reversed his forward guidance policy introduce last August as unemployment fell faster than previously expected.
Under the policy, a fall unemployment to below 7pc was given as a threshold for raising rates, with the Bank predicting this would happen no earlier than 2016. However, the jobless rate is now forecast to fall to 6.9pc by March, and 6.3pc by the end of the year.
Mr Carney said: “What we actually said was we wouldn’t even begin to think about adjusting interest rates until unemployment came down. As you said, it’s come down faster than we expected.”
The Bank of England has puts its focus on encouraging business investment, which the Mr Carney said was down to reducing “uncertainty”.
“The uncertainties that we can influence at the Bank of England is not a European referendum or a Scottish referendum. What we can influence are uncertainties about the financial system, we’re very involved in fixing … you know finishing the job, fixing the financial system, and uncertainty about the path of monetary policy. And so what we’re trying to do,” he said.
Discussing the prospect of Scottish following his speech in Edinburgh last month where he warned that as an independent country it could not count on using the pound, Mr Carney repeated his warning about the implications of a 'yes’ vote.
“There’s issues around banking, but specifically on the fiscal side, the observation that I made was that in virtually all currency unions there are substantial fiscal arrangements that help equalise fiscal capacity,” he said.
The Bank of England Governor denied there was a property market bubble and pointed to mortgage levels that are “more than 25pc below their historic averages”.
He also refused to criticise the government’s controversial Help to Buy scheme, which has been blamed for fuelling house price rises.
“If we’re not comfortable with it [Help to Buy], we will say, and we will say clearly and publicly,” said Mr Carney.
He pointed to housing sales and said Help to Buy supported-purchases totalled about 6,000 and “only 700 in the most aggressive end of Help to Buy”.
He said: “So it’s pretty small. It’s all outside of London. It’s for lower priced houses as a whole and it’s mainly first-time buyers. So it’s not driving the housing market, but we have a responsibility to watch it and we will.”
Much of the rise in house prices in London has been caused by foreign buyers, according to Mr Carney, who said the Bank of England lacked powers to control interest from abroad in the British property market.
“Much of what’s driven in London of course is not mortgage driven, but it’s cash driven. It’s driven by... the top end of London is driven by cash buyers. It’s driven in many cases by foreign buyers. We as as the central bank can’t influenc that. We change underwriting standards, it doesn’t matter, there’s no mortgage. We change interest rates, it doesn’t matter, there’s not a mortgage. But we watch and we watch the knock-on effect,” he said.
Looking at the international backdrop, Mr Carney said the eurozone’s problems would only be solved by what he called a “stabilising mechanism”.
He added: “This is one of the fundamental challenges in the Eurozone. So it’s very relevant for the United Kingdom because it’s our largest export partner; and ultimately, I’m very clear about this, in our view the eurozone will have to move to some form of deeper fiscal arrangement.”
