Carney: Recovery ‘won’t come cheap’

Mark Carney, governor of the Bank of England, has said the bank's Monetary Policy Committee will consider how to change its forward guidance in February as he assured markets that rates are not set for an immediate rise and that stimulus measures “will remain exceptional for some time”.

Mr Carney told business leaders at a CBI lunch during the Davos world economic conference in Switzerland today (24 January) that the current unemployment rate of 7.1 per cent is a red herring, despite the Bank’s guidance itself setting an employment rate of 7 per cent as its main threshold before a rate rise would be considered.

Mr Carney explained there are still 750,000 more people out of work compared to pre-crisis and a similar increase in part-time working than previously, which was holding back wage growth.

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His comments come as the government published a review stating that after income tax changes, wage increases have actually been beating inflation in the last year.

Mr Carney said: “Even though unemployment is falling faster than expected, the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy.”

In August last year Mr Carney announced the base rate would remain at the historical low level until 2015. However, in his forward guidance, Mr Carney said if unemployment dropped below 7 per cent, or if there were changes to CPI inflation or a threat to the country’s long-term financial stability, the rate was subject to change.

In today’s speech, Mr Carney said it is “widely recognised that our 7 per cent threshold is not a trigger for raising bank rate”.

He said: “Last August, the MPC said that when the 7 per cent unemployment threshold was reached, there should be no assumption of an immediate, automatic change to its policy stance.

“It would assess the prevailing economic conditions, including wider measures of slack and inflationary pressures, before deciding the appropriate stance for monetary policy.”

Mr Carney added that reaching the 7 per cent unemployment threshold will not force the MPC to “immediately” raise bank rate.

He said: “The Bank’s assessment of how to evolve guidance to changing circumstances will begin in our February Inflation Report.

“The MPC will consider a range of options to update our guidance, recognising both what we have learned about the behaviour of aggregate supply in the economy as well as the more benign inflation outlook.”