DAVOS, Switzerland (Reuters) - Bank of England Governor Mark Carney sought to quash growing speculation that interest rates may rise sooner than the central bank has signaled after its first attempt to steer markets was overtaken by Britain’s economic turnaround.
In a speech on Friday, Carney stressed the economy was not yet strong enough to cope without stimulus.
“A few quarters of above-trend growth driven by household spending represent a good start, but they aren’t sufficient,” Carney told business executives on the sidelines of the World Economic Forum in Davos, Switzerland.
Carney and his fellow policymakers are under pressure to spell out how the BoE will steer markets after its first attempt at “forward guidance” on when interest rates might rise was quickly rendered obsolete by a sharp fall in unemployment.
In his speech, Carney acknowledged that unemployment was falling to the Bank’s 7 percent threshold “materially earlier than we had expected”, echoing comments he made in a television interview on Thursday.
But he said there were signs that the rate of unemployment consistent with stable inflation “is somewhat lower” than the BoE thought in August.
“This suggests that, 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,” Carney said.
Sterling hit its highest level in more than five years against a trade-weighted basket of currencies on Friday as investors added to bets that the BoE might have to raise rates sooner than it wants. <GBP/>
Carney said the BoE would start the process of “how to evolve guidance to changing circumstances” next month.
“The MPC will consider a range of options to update our guidance, recognizing both what we have learned about the behavior of aggregate supply in the economy as well as the more benign inflation outlook,” he said.
Speaking in Davos earlier, British finance minister George Osborne rejected suggestions the BoE’s forward guidance policy had failed, adding that the Bank was facing “the challenge of success”.
One problem for the BoE has been the weak performance of productivity in Britain in recent months as the economy grew more slowly than employment, potentially creating inflation pressures in the future.
Carney said he expected productivity growth to pick up as the recovery gathers steam and the banking system recovers.
“Nevertheless, it appears that the recovery will need to be sustained for a period before productivity gains can resume in earnest,” he said.
Carney added that underlying inflation pressures remained low.
Carney used his speech to underscore how long British monetary conditions will remain supportive of growth, even when rates start to go up.
“These persistent headwinds mean that, even in the medium term, the level of interest rates necessary to sustain low unemployment and price stability will be somewhat lower than before the crisis,” he said.
Additional reporting by William Schomberg and David Milliken in London; Writing by William Schomberg; Editing by Catherine Evans