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UK economy well short of escape velocity, Mark Carney tells Davos UK economy well short of escape velocity, Mark Carney tells Davos
(35 minutes later)
Mark Carney insisted Britain's economy remains well short of achieving "escape velocity" from recession as the Bank of England governor said policy would remain on an emergency setting for some time to come. Mark Carney insisted on Friday that Britain's economy remains well short of achieving "escape velocity" from recession as the Bank of England governor said policy would remain on an emergency setting for some time to come.
In a speech to UK business leaders in Davos, Carney said the Bank's nine-strong monetary policy committee would look at its forward guidance strategy following the sharper than expected fall in unemployment in recent months.In a speech to UK business leaders in Davos, Carney said the Bank's nine-strong monetary policy committee would look at its forward guidance strategy following the sharper than expected fall in unemployment in recent months.
But he hinted that he currently favoured updating rather than ditching his flagship policy initiative and pledged that the degree of stimulus would "remain exceptional for some time".But he hinted that he currently favoured updating rather than ditching his flagship policy initiative and pledged that the degree of stimulus would "remain exceptional for some time".
Carney added: "That should help reassure British business that the path of interest rates will be consistent with a sustained recovery – that is, with escape velocity."Carney added: "That should help reassure British business that the path of interest rates will be consistent with a sustained recovery – that is, with escape velocity."
The Bank has been surprised by the recent performance of the economy, having predicted last August that it could be early 2016 before the jobless rate hit 7%.The Bank has been surprised by the recent performance of the economy, having predicted last August that it could be early 2016 before the jobless rate hit 7%.
"A few quarters of above-trend growth driven by household spending represent a good start, but they aren't sufficient", Carney said as he discussed the prospects for permanent exit from the deepest recession of the post-war era."A few quarters of above-trend growth driven by household spending represent a good start, but they aren't sufficient", Carney said as he discussed the prospects for permanent exit from the deepest recession of the post-war era.
"It will take sustained growth, more balanced demand and a recovery in the supply side for advanced economies to break free into a more normal universe.""It will take sustained growth, more balanced demand and a recovery in the supply side for advanced economies to break free into a more normal universe."
The governor said there had been encouraging signs, with the UK and the US leading the way among developed countries and the eurozone at last showing signs of life.The governor said there had been encouraging signs, with the UK and the US leading the way among developed countries and the eurozone at last showing signs of life.
"None of this is to suggest that current levels of economic activity are acceptable or that the world economy is no longer under strain. After the Great Moderation and the Great Recession, there are several reasons why it will be years before any superlatives are attached to this recovery.""None of this is to suggest that current levels of economic activity are acceptable or that the world economy is no longer under strain. After the Great Moderation and the Great Recession, there are several reasons why it will be years before any superlatives are attached to this recovery."
Carney said overall debt burdens of advanced countries had increased since the crisis, the global economy remained unbalanced and confidence remained fragile. Carney said the overall debt burdens of advanced countries had increased since the crisis, the global economy remained unbalanced and confidence remained fragile.
But he said policymakers had avoided the mistakes made during the 1930s and there was a chance that a new wave of innovations would lead to a new era of growth, following the pattern of the post second world war boom. But he said policymakers had avoided the mistakes made during the 1930s and there was a chance that a new wave of innovations would lead to a new era of growth, following the pattern of the post-second world war boom.
"Protectionism is being resisted, banks recapitalised, and the global financial system rebuilt. In parallel, monetary policy is highly accommodative," he said."Protectionism is being resisted, banks recapitalised, and the global financial system rebuilt. In parallel, monetary policy is highly accommodative," he said.
"As the global economy gains momentum, staying the course on these policies will be decisive to achieving escape velocity. The United Kingdom is at the centre of these decisions.""As the global economy gains momentum, staying the course on these policies will be decisive to achieving escape velocity. The United Kingdom is at the centre of these decisions."
Carney admitted that unemployment had fallen faster than predicted since August when the Bank set a 7% jobless rate as the threshold for considering higher interest rates. Carney admitted that unemployment had fallen faster than predicted since August when, the Bank set a 7% jobless rate as the threshold for considering higher interest rates.
"The latest data show that more than a quarter of a million jobs were created in a three-month period – the biggest increase since records began in 1971. As a result, unemployment seems to be falling at a pace that will reach our 7% threshold materially earlier than we had expected.""The latest data show that more than a quarter of a million jobs were created in a three-month period – the biggest increase since records began in 1971. As a result, unemployment seems to be falling at a pace that will reach our 7% threshold materially earlier than we had expected."
Many City economists expect unemployment to hit 7% within the next couple of months, but Carney said this would not lead to rates being raised from 0.5%, where they have been since early 2009.Many City economists expect unemployment to hit 7% within the next couple of months, but Carney said this would not lead to rates being raised from 0.5%, where they have been since early 2009.
"Crucially, unemployment remains above the level that is likely to be consistent with maintaining inflation at the target in the medium term. It is not just that nearly three quarters of a million more people are out of work than before the crisis; another three quarters of a million more people are involuntarily working part time." "Crucially, unemployment remains above the level that is likely to be consistent with maintaining inflation at the target in the medium term. It is not just that nearly three-quarters of a million more people are out of work than before the crisis; another three-quarters of a million more people are involuntarily working part-time."
Giving a clear signal that he favoured amending forward guidance to take account of the improving labour market, the governor said: "It now seems likely that the rate of unemployment consistent with stable inflation in the medium term is somewhat lower than the MPC assessed back in August.Giving a clear signal that he favoured amending forward guidance to take account of the improving labour market, the governor said: "It now seems likely that the rate of unemployment consistent with stable inflation in the medium term is somewhat lower than the MPC assessed back in August.
"In part that is because rates of transition into jobs, even for those who have been unemployed for more than a year, have been sustained at high rates, minimising the extent of skill atrophy. In addition, other measures of slack in the labour market, such as involuntary part-time working remain high. "In part that is because rates of transition into jobs, even for those who have been unemployed for more than a year, have been sustained at high rates, minimising the extent of skill atrophy. In addition, other measures of slack in the labour market, such as involuntary part-time working, remain high.
"This suggests that, even though unemployment is falling faster than expected, the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy. It is widely recognised that our 7% threshold is not a trigger for raising Bank Rate." "This suggests that, even though unemployment is falling faster than expected, the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy. It is widely recognised that our 7% threshold is not a trigger for raising Bank rate."
Carney said that when the Bank announced forward guidance it made clear that the 7% unemployment threshold was not an interest-rate trigger.Carney said that when the Bank announced forward guidance it made clear that the 7% unemployment threshold was not an interest-rate trigger.
"The MPC will consider a range of options to update our guidance, recognising both what we have learned about the behaviour of aggregate supply in the economy as well as the more benign inflation outlook.""The MPC will consider a range of options to update our guidance, recognising both what we have learned about the behaviour of aggregate supply in the economy as well as the more benign inflation outlook."