BANK of England governor Mark Carney has hit back at suggestions that the economy could be trapped at a permanently lower rate of growth, painting a promising picture of the outlook for the UK.
“For the first time in a long time it seems reasonable to expect the hopes and dreams of the holiday season to be fulfilled,” Carney told an audience in New York yesterday, referring to those who remain as pessimistic as “the ghost of Christmas past”.
Responding to concerns that the British economy could be stunted by a long stretch of slow growth, Carney said: “There is a long history of pessimism in economics... Such worries have proven misplaced in the past and scepticism is warranted now.”
Carney’s speech delivered a rebuttal to former US Treasury secretary Larry Summers, who suggested last month that some advanced economies could be trapped in a prolonged era of slow growth and low investment.
Despite the rosy outlook for 2014, the governor still believes monetary policy should remain ultra-loose, allowing supply and productivity gains to be made in response.
Such loose policy could even include keeping rates at rock bottom if unemployment falls below the seven per cent threshold more quickly than the Bank anticipates, so long as inflation does not pick up again.
But some analysts remained sceptical about Carney’s optimism.
“It’s increasingly hard to square a normalising recovery with these emergency monetary policy settings just because there are new macro-prudential tools,” said Ross Walker at RBS.
“There’s an increasingly awkward balancing act here. I hope he’s right but a lot is now resting on this notion that a recovery in demand will solicit a sufficient supply response – there’s a risk that this is wishful thinking.”
Carney also addressed difficult questions about the UK’s rapidly heating housing situation, pledging not to let the UK’s property market reach what he called “warp speed”.
And he stressed the need to look at conditions across the UK, not just in London. “If you buy your Knightsbridge house for cash, the Bank of England will not have much effect for you,” he said, arguing that the capital’s property market is shaped more by global than domestic forces.