Sunday 18 February 2018

Carney not concerned by 'overheating'

Bank of England governor Mark Carney.
Bank of England governor Mark Carney.

David Milliken and Andy Bruce

BANK of England Governor Mark Carney signalled he was not concerned that Britain's economy was close to overheating, despite a strong recovery since last year, putting himself in the dovish camp among policymakers.

Speaking to MPs yesterday, Mr Carney said the amount of spare capacity in the economy was probably slightly more than 1.5pc of gross domestic product, suggesting the BoE can hold off on raising interest rates for longer.


Mr Carney also said Britain's natural rate of unemployment could be less than the bank has estimated, meaning the labour market can strengthen further without pushing up inflation.

Last month, the BoE put its assessments of spare capacity in the economy at the centre of its deliberations on when it will raise interest rates from a record low 0.5pc, where they have stood since 2009 as Britain tries to recover from the financial crisis.

"We ranged in the February inflation report (that spare capacity) was 1-1.5pc," Mr Carney told the Treasury Select Committee in Britain's parliament. "I personally would be at the upper end of that range and I would add that the margin, given the most recent employment report, that it would probably be slightly higher than that 1.5pc."

Britain's unemployment rose to 7.2pc in the three months to December, ending a string of falls that took the BoE by surprise. Sterling weakened as Mr Carney spoke. The pound has outpaced many other currencies in recent months on expectations that interest rates could rise in Britain before other economies.

In a sign of the different views among BoE policymakers on how long the economy can continue its recovery without fuelling inflation, Martin Weale – known as a hawk on the Monetary Policy Committee – said he thought the amount of spare capacity was probably "something under 1pc".

Financial markets have pointed to spring 2015 as a potential time for the first rate hike.

Output is still just below its peak in the first quarter of 2008 – a much weaker recovery from the financial crisis than in most other big advanced economies.

The BoE is concerned that low productivity may limit Britain's ability to catch up without generating higher inflation in the medium term.

But Mr Carney said productivity may be moving towards its long-term trend. "The most recent figures on productivity suggest around a 2pc annualised growth rate, which is coming for the first time... towards trend."

Meanwhile, Mr Carney said a BoE employee suspended last week was put on leave for potentially failing to escalate an issue and not because anyone there had turned a blind eye to currency manipulation.

"We have no information that suggests that anyone at the BOE condoned manipulation of markets, facilitated, participated in market manipulation but that's a pretty low bar," Mr Carney told the committee.

Lawmakers questioned him after records released last week seemed to show that senior currency dealers discussed with BOE officials concerns that the market was being manipulated as early as 2006.

The central bank opened a review in October into allegations that staff condoned practices at the heart of the currency-manipulation scandal.

"If something is not escalated we have to make a judgment on where that responsibility lies," Mr Carney said, without elaborating on what should have been escalated. "We've made that judgment and we stand by it."

Irish Independent

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