* BoE may add stimulus if markets get ahead of themselves
* BoE's forward guidance was clear, Carney says
* Wrong to focus on market expectations for rates - Carney
* Looser liquidity rules to help free up lending
By David Milliken
NOTTINGHAM, England, Aug 28 The Bank of England
may provide more stimulus for Britain's economy if financial
markets get ahead of themselves and threaten to choke off its
recovery, its governor said on Wednesday.
In his first policy speech since taking over the bank, Mark
Carney also announced a relaxation of rules for banks which
could boost lending and help Britain's "solid but not stellar"
emergence from its deep recession.
Financial markets have challenged the BoE's new plan to keep
interest rates on hold for possibly three more years and Carney
said the bank could provide more stimulus if premature rate hike
expectations added to risks facing the recovery.
"The upward move in market expectations of where Bank Rate
will head in future could, at the margin, feed into the
effective financial conditions facing the real economy," Carney
said, adding policymakers would watch those conditions closely.
"If they tighten, and the recovery seems to be falling short
of the strong growth we need, we will consider carefully
whether, and how best, to stimulate the recovery further."
Sterling initially weakened but recovered its losses against
the dollar and expectations that the BoE might have to raise
interest rates in 2015, a year earlier than its plan implies,
were little changed. British government bond prices fell,
pushing up yields further, as investors worried that the new
bank rules could lead to sales of gilts.
Carney sought to underscore his message that the BoE's new
forward guidance plan - something he deployed while running the
Bank of Canada and helped land him the job in London - was not
reliant on how financial markets responded.
"Hanging this on markets is to miss the point," he told
reporters after making his speech to business representatives in
the city of Nottingham, far from London's financial hub.
"What my colleagues and what I am hearing across the country
is that there is appreciation for that greater degree of
certainty that is being provided by the bank," he said.
The BoE's interest rates, not market rates, were most
important to most households and businesses, Carney said.
Philip Rush, an economist with Nomura, said the comments on
more stimulus did not appear to signal any imminent new move.
"Easing is not ruled out if higher rates start to impair
recovery but that point does not seem upon us," Rush said.
"While higher rates reflect stronger growth, easing would
constitute a negative confidence shock - i.e. the opposite of
what the BoE is trying to achieve."
The Bank of England spent 375 billion pounds ($580 billion)
on government bonds between 2009 and last year to try to prop up
Britain's economy after the financial crisis.
Carney said the option of further stimulus was part of the
forward guidance plan announced by the BoE this month. That plan
mentioned the possibility of further asset purchases. Carney
declined to go into detail on stimulus options on Wednesday.
Most of the bank's nine top policymakers are opposed to a
revival of the bond-buying programme although it was supported
by Carney's predecessor Mervyn King.
And if it did want to do more to help growth, the bank would
need to show it can keep its foot on the stimulus pedal without
pushing up already above-target inflation.
That challenge was made greater after one of the BoE's
policymakers voted against the forward guidance earlier this
month, voicing concerns about inflation.
Carney dedicated much of his speech to explaining why the
central bank believed unemployment would fall only slowly,
pointing to expected further job losses for public workers and
large numbers of part-time workers who want to work full-time.
Markets appear to expect unemployment to fall to 7 percent
by mid 2015 but Carney said the bank saw only a one in three
chance of this happening.
He said the BoE remained committed to fighting inflation but
it was right for it to allow it to come back down to its 2
percent target only slowly, given the weak state of the economy
and temporary factors pushing up price growth.
Carney announced a widening of a planned relaxation of rules
on banks and building societies, on condition they meet new
requirements on capital buffers.
Under the change, eight major lenders in Britain would be
allowed to reduce their required liquid asset holdings - cash
and safe but low-yielding investments - by 90 billion pounds if
they meet the minimum 7 percent capital requirement, freeing up
more money for lending and in turn spurring growth.
That kind of increase in the potential supply of credit had
the potential to provide "a significant jolt" towards getting
lending back to normal although it remained to be seen if
companies were confident enough to borrow more, said Simon
Hayes, an economist with Barclays.
In a nod to concerns about the property market heating up
again, Carney said the BoE was "acutely aware" of the risk of
unsustainable credit and house price growth but said gauges of
the housing market and household borrowing costs were not at
historically high levels.