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UK economy needs sustained low interest rates, says Mark Carney | UK economy needs sustained low interest rates, says Mark Carney |
(about 7 hours later) | |
Britain's economy needs sustained low interest rates to spur growth and repair the stricken banking sector, the Bank of England governor Mark Carney has warned, in a strong rebuttal of critics calling for a rapid rate hike in response to a galloping housing market. | |
Speaking in New York, Carney said it would be a mistake "to rush to a more extreme response" when the UK economy remained blighted by high unemployment and slow growth in major export markets. | Speaking in New York, Carney said it would be a mistake "to rush to a more extreme response" when the UK economy remained blighted by high unemployment and slow growth in major export markets. |
His comments followed a report by the Royal Institution of Chartered Surveyors – which represents surveyors and estate agents – that found expectations for future house price growth hit a 14-year high during November. A combination of soaring demand and the restricted supply of new homes pushed price expectations for the new year to a level not seen since the height of the 1990s boom, it said. | |
Almost 60% more surveyors and estate agents across the country predicted prices would continue their upward trend rather than fall back over the coming three months. "This is the highest reading since September 1999 and demonstrates the impact that the recovery in demand allied with anaemic supply is having on the housing market," said RICS's chief economist Simon Rubinsohn. | |
"Housebuilding is on the up, but it is rising nowhere near quickly enough to make up the shortfall that has built up in recent years." | |
Several MPs on the Treasury select committee joined the chorus of disapproval at rising house prices during a hearing with Robert Chote, the head of the Office for Budget Responsibility, the government's independent economic forecaster. | |
Questioning Chote about the chancellor George Osborne's autumn statement last week and the prospects for the government's finances, Tory MP Brooks Newmark said a housing boom was potentially destabilising. | |
Newmark said a housing bubble could undermine the progress made during the recovery from the financial crash. | |
Chote argued that it was possible rising prices were due to market forces and not a bubble. He said it was possible rising debt levels would be followed by rising wages, which would keep household debts within sustainable levels. | |
Meanwhile, Carney said a resurgence of consumer spending and a housing market recovery should be welcomed. He said the UK economy was regaining some of its old strength and heading for sustained growth. | |
But he said subdued export markets and the weakness of the banking sector still weighed heavily and hampered growth. | |
He said: "The Ghost of Christmas Past should not be forgotten. A recovery may be gaining pace but our economies are a long way from normal. [Borrowing] is still high and weak demand for advanced economy exports could persist for some time. | He said: "The Ghost of Christmas Past should not be forgotten. A recovery may be gaining pace but our economies are a long way from normal. [Borrowing] is still high and weak demand for advanced economy exports could persist for some time. |
"The Ghost of Christmas Yet to Come suggests that it is unlikely that equilibrium interest rates will return to historically normal levels any time soon," he said. | "The Ghost of Christmas Yet to Come suggests that it is unlikely that equilibrium interest rates will return to historically normal levels any time soon," he said. |
The Bank of England's monetary policy committee, which Carney chairs, published forward guidance in the summer that linked a rise in interest rates to a fall in unemployment to 7%. The committee estimated that the target will be reached in the autumn of 2016. | The Bank of England's monetary policy committee, which Carney chairs, published forward guidance in the summer that linked a rise in interest rates to a fall in unemployment to 7%. The committee estimated that the target will be reached in the autumn of 2016. |
But market analysts are expected a rise in rates a year earlier following a sharper than expected fall in the unemployment rate during the last three months to 7.6% from 7.8%. | But market analysts are expected a rise in rates a year earlier following a sharper than expected fall in the unemployment rate during the last three months to 7.6% from 7.8%. |
Carney said his concerns about the underlying problems facing the UK economy had failed to dim his optimism about the country's long term future. In a direct riposte to economists, including former White House economics adviser Larry Summers, who have argued that the west is entering a period of Japanese-style stagnation, Carney said it was possible for the BoE to adopt a "catalytic role to help deliver [sustained growth]" alongside political measures to "reinforce an open, global economy". | |
Summers said earlier this year that western economies were destined to follow Japan's lead into a long period of low growth as they struggled to compete against Asian economies while managing their ageing workforce. | Summers said earlier this year that western economies were destined to follow Japan's lead into a long period of low growth as they struggled to compete against Asian economies while managing their ageing workforce. |
Summers said the response of central banks to make credit cheap had failed in the past to encourage growth. | Summers said the response of central banks to make credit cheap had failed in the past to encourage growth. |
The governor argued that the BoE's policy of low interest rates allowed banks and households to repair their finances and pay down debts. Only when the conditions for consistent growth are established will the UK restore the confidence needed to encourage investment growth, he said. | |
A report by the Council of Mortgage Lenders (CML) argued an unbridled housing boom was unlikely. It said stretched household finances, tighter regulations on lenders and the prospect of higher rates in the medium term meant housing market activity may well "ease back of its own accord". | |
The CML predicted a rise in gross lending from an estimated £170bn this year to £195bn next year, and £206bn in 2015. | |
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