Mark Carney also said he would be “vigilant” in making sure Britain’s booming housing market does not get out of control and cause another bust.
And the governor warned unemployment may fall more slowly than markets expect because the downturn caused a big rise in the number of people out of work for a sustained period.
After years of above-target inflation, Mark Carney told the Treasury Select Committee (TSC) he would “not take risks with inflation expectations.”
It came after fellow monetary policy committee member David Miles noted the Bank of England’s inflation forecasts have underestimated price rises 18 months ahead by as much as 1.5 percentage points.
“I have more confidence in our forecasts going forward. This is about returning inflation to target,” Carney told the Treasury Select Committee.
“I am not afraid to raise interest rates, let’s be clear, if it is appropriate. I am the only sitting G7 governor to have done that.”
Under his forward guidance policy the Bank will only consider raising interest rates when unemployment falls to seven per cent, or when the Bank forecasts inflation will be above 2.5 per cent in 18 to 24 months’ time.
And even if the recovery falters, Carney said he will not consider more quantitative easing if inflation is forecast to come in above that level.
His reassurances were part of a drive to soothe worries from MPs that the Bank has failed to combat price rises in recent years. But there are still some concerns from MPs over the structure and operation of forward guidance.
“Credibility in monetary policy is hard won and easily lost. The new framework – with its target, threshold and three knockouts – is more complex to explain than its predecessor,” said TSC chairman Andrew Tyrie. “Rightly, the Bank is now engaged in bolstering credibility in its new framework with detailed explanations.”