Speaking at a business lunch in the east Midlands, in a speech entitled ‘Crossing the threshold to recovery’, Carney explained his framework of forward guidance.
It was agreed unanimously by the MPC that until unemployment fell from 7.8% to 7% there was no intention to increase the base interest rate, which has been at a record low of 0.5% for over three years now.
He was also keen to get across that further stimulus could yet be on the cards.
“The MPC will be watching [the financial conditions facing the economy] and if they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further. Our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more,” he said.
A triumvirate of jobs, incomes and spending must be on the up before interest rates can be increased, Carney said.
He added the threshold must be met in a disciplined way: "We will ensure that we bring inflation down as the recovery progresses. And we will use our considerable policy tools to prevent new vulnerabilities, whether in the housing sector or financial sector, from arising during this critical transition period.”
Carney said the 7% figure was not a target but a ‘staging post’ and suggested unemployment should be far lower.
On inflation, Carney said: “Although there will be bumps in the road, inflation is set to fall back over the next two years. In these circumstances it would not make sense to choke off the recovery by raising interest rates prematurely.
“Given that ‘administered and regulated’ price increases will continue to push up on inflation over the next two years, the MPC is prepared to bring inflation back to the target over two years or a little longer.”
