Tuesday 06 August 2013 9:33 pm

Bank of England governor faced with dilemma as economic recovery picks up pace

NEW BANK of England boss Mark Carney faces his first real challenge as governor today, as he reveals a key decision on reforms that could lead to higher inflation.

The Bank’s rate-setters publish their views on the potential for new unconventional monetary policy tools this morning, as part of their quarterly inflation report. The monetary policy committee (MPC) was tasked with an assessment by chancellor George Osborne in March.

The report into these unconventional changes coincides with growing evidence that the economy is heating up.

Economists believe that the new governor will announce some variety of forward guidance: a promise to keep interest rates for the near future, or until some specific marker of economic performance is reached. But robust signs of economic growth have made drastic easing seem less likely than it did when Carney was appointed in November.

Official statistics released yesterday showed a strong upswing for industrial production in June, rising by 1.2 per cent in 12 months, the fastest increase in over a year. The uplift was driven by manufacturing, where production was up by two per cent in the same period.

Other announcements provided evidence that growth is speeding up. New car registrations rose for the 17th month in a row, and, according to the National Institute of Economic and Social Research, the economy grew by 0.7 per cent between May and July. Meanwhile the Halifax revealed the fastest annual rise in house prices since 2010

Despite this, analysts are still split on the merits of committing to loose monetary policy for the time ahead. Former MPC member Andrew Sentance commented: “I’m a bit of a sceptic about this type of forward guidance. The big challenge for Carney is moving away from emergency policy. We’re not in an economic emergency now. We need to get out of that mode of thinking”.

Vicky Redwood of Capital Economics disagreed, drawing comparisons to the rise in growth through 2010: “The danger is assuming that a continued recovery is now guaranteed, leading policy makers to let down their guard. Despite the more positive economic signs, the MPC should, and probably will, press ahead with formal guidance on interest rates [in today’s announcement]”.