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Unveiling new approach, Bank of England's Carney says interest rates to stay low for a while

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LONDON - Bank of England Governor Mark Carney sought Wednesday to assure homebuyers and businesses that U.K. interest rates won't rise any time soon because the economic recovery is still fragile.

Though headline figures for growth and unemployment have improved faster than previously predicted, Carney said there are a number of issues that will mean interest rates have to remain low for a while to come. The bank's benchmark interest rate has been at a record low level of 0.5 per cent for nearly five years.

He noted that wages and price pressures remain fairly subdued and that the recovery has not spread equally through the country — London and the southeast of England are witnessing a bigger economic rebound, particularly in the housing market, than say, areas of the north.

"The continuation of significant headwinds — both at home and from abroad — mean that Bank Rate may need to remain at low levels for some time to come," Carney said as the bank published its latest quarterly economic projections.

"We're not going to take risks with this recovery," he added.

Carney's comments were hugely anticipated in light of a sharper than anticipated fall in U.K. unemployment. When he took the job last summer, Carney said the bank wouldn't raise interest rates at least until unemployment had fallen to 7 per cent. At 7.1 per cent at last count, an update was needed.

Carney dismissed suggestions that linking potential policy changes to one indicator was a mistake. He noted that the "forward guidance" helped to anchor market expectations of the future path of interest rates that allowed consumers and businesses to spend.

Using the set-piece point of the quarterly Inflation Report, Carney redefined the bank's guidance to include a range of parameters. As well as monitoring inflation and wages, he said the Bank will be closely assessing the spare capacity in the economy — essentially a measure at which an economy is operating below a level that may stoke inflation. In the wake of the 2008 financial crisis and Britain's subsequent recession and subdued recovery, the Bank estimates that spare capacity to be around 1 per cent to 1.5 per cent.

Though Carney said he wants to eliminate the spare capacity over the Bank's three year forecast horizon, interest rates would likely rise before then because of the time lags involved — higher interest rates can take over a year to feed through an economy.

"To that end, it judges that there is scope for the economy to recover further before Bank Rate is raised and, even when Bank Rate does rise, it is expected to do so only gradually and to a level materially below its pre-crisis average of 5 per cent," the bank said it its report.

The main takeaway in the markets appears to be that interest rates aren't going anywhere soon but that increases will be on the agenda at some stage over the next couple of years.

Jonathan Loynes, chief European economist at Capital Economics, said the change in tack has "not altered our view that the first rate hike will not come until late next year."

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