News Column

UK 'halfway' to recovery

August 18, 2014



BoE chief Carney says interest rate may rise before workers' wages increase



Britain's economy is "more than halfway" down the path to full recovery, but any interest rate rises will be "limited" and "gradual", Bank of England boss Mark Carney said on Sunday.







In an interview with The Sunday Times, Carney declared that the economy was now undergoing genuine expansion following the economic crisis of 2008.







"Wherever the finish line was in the depths of the crisis, we are much more than halfway towards that finish line now," he said.







"The expansion is proceeding, momentum is more assured; the very fact we have had consistent quarters of growth in line with, or slightly better than, our forecasts shows that," added the Canadian.







Carney sought to reassure indebted householders that interest rates were not set to rise sharply any time soon.







"There are big pockets of households who will be very sensitive to interest rate increases when they begin, so it makes sense to be gradual," he said.







Britain's economy grew by 0.8 per cent in the second quarter of 2014 compared with output in the first three months of the year, official data showed on Friday.







Gross domestic product had also expanded by 0.8 per cent during the first quarter of the year, the Office for National Statistics said in a statement, confirming initial estimates provided last month.







Rate hike



Carney said officials may raise the key interest rate before workers' pay increases, according to The Sunday Times interview.







"We have to have the confidence that prospective real wages are going to be growing sustainably" before raising borrowing costs, he said. "We don't have to wait for the fact of that turn to raise them."







The BoE has held the key rate at a record-low 0.5 per cent since March 2009 even as the International Monetary Fund projects the UK to have the fastest economic expansion among Group of Seven nations this year. At the same time, the central bank last week lowered its forecast for wage growth and said it will place more weight on earnings as it assesses policy.







Under Carney, the BoE has shifted its guidance on interest rates from unemployment to spare capacity and now wages. Pay fell an annual 0.2 per cent in the second quarter, the first decline since 2009, according to the Office for National Statistics.







Carney said in the interview that officials are "united" on the need for rate increases to be limited and gradual, to accommodate the strain that higher borrowing costs will place on households.







"There are big pockets" of households "who will be very sensitive to interest-rate increases when they begin, so it makes sense to be gradual," he said.







Price outlook



The bank raised its growth projections last week and narrowed its estimate of slack remaining in the economy, while saying inflation would remain below its two per cent goal through its forecast period.







The BoE's price projections are compatible with the pound's appreciation because of the narrowing of slack, according to Carney.







Sterling has risen almost seven per cent against the dollar over the past year.







The governor also said banks have made "substantial progress" in returning to normal. Pay practices that effectively circumvent a European Union bonus cap could be "sensible" if properly designed, The Sunday Times reported him as saying.







"The expansion is proceeding, momentum is more assured," and "the very fact we have had consistent quarters of growth in line with, or slightly better than, our forecasts shows that," he said. "Wherever the finish line was in the depths of the crisis, we are much more than halfway toward that finish line now."







Necessary decisions



The governor said the BOE is ready to be the first of the four biggest central banks to raise interest rates. The European Central Bank cut its benchmark rate in June, while the U.S. Federal Reserve and Bank of Japan are still adding stimulus.







"Monetary policy is heading in a different direction in at least two of the four" regions, and "we will do what we need to do," he said. "But we are comfortable taking the necessary policy decisions."







Minutes of the Monetary Policy Committee's July meeting to be published on August 20 will show whether unanimity under on rates has ended. Since the former head of the Canadian central bank joined the BoE last year, no member of the MPC has dissented on an interest-rate vote.







"It is entirely healthy for people to have different views on the committee and it is to be expected at a time when decisions become more finely balanced," Carney said.












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Source: Khaleej Times (United Arab Emirates)


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