Governor stands firm on plan for UK interest rates

Tim Wallace
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INTEREST rates could stay at rock bottom even after unemployment falls below seven per cent, Bank of England governor Mark Carney said yesterday.
In a bid to convince sceptical markets he really is serious about keeping rates down for the next three years, Carney said he would look for a wide range of evidence that the recovery is strong and sustainable before tightening monetary policy.
Rates will also stay low even if a housing bubble develops, as the Bank can target mortgage lending levels.
The governor announced the policy of forward guidance at the start of the month, but investors indicated they believe rates will rise more quickly than the governor suggested.
“One possible explanation is that markets think that unemployment will come down to seven per cent more quickly than we do,” he said.
“The seven per cent threshold is a staging post to assess the economy – nobody should assume that it is a trigger for raising rates.”
He will look at other factors including total hours worked, involuntary part-time work, and other measures of spare capacity before deciding to hike rates, he said.
Even if a housing bubble develops – and the governor insisted one has not emerged yet – he will not hike rates.
Instead the Bank can increase capital requirements against home loans to cut mortgage lending.
As a result, Carney hopes this would deflate a bubble without the need to raise interest rates for other borrowers like businesses.
However his speech came as the Council of Mortgage Lenders revealed the number of first time buyers in London hit its highest level since 2007, with the average loan size up almost £10,000 on the year to £92,600.
Q&A: The BoE’s liquidity sweetener
Q What is the liquidity buffer?
A Banks have built up big buffers of liquid assets to make sure they can fund a whole month of outgoings if there is a shock cut in access to markets, leaving them sitting on billions in assets they cannot lend out.
Q What has changed now?
A If banks are considered safe by the Bank of England, they will be allowed to reduce liquidity holdings by up to 20 per cent. A wider range of assets will also be eligible for the liquidity buffer, including mortgage backed securities and some corporate bonds, freeing up more top quality assets. If the biggest eight lenders take advantage of this, they could lend out another £90bn.
Q Will all banks and building societies do this?
A Not all of them are allowed to yet – RBS, Lloyds, Barclays, Nationwide and the Co-op Bank have all been told to do more to increase their capital buffers before they can take advantage of the new rule. But they have plans in place to do that over the coming months.