UK 'still needs monetary stimulus'
Interest rates will rise more slowly than previously thought because of pressure from the global economy, Bank of England governor Mark Carney told MPs today.
Mr Carney said he expected that "the next move in policy is going to be an increase" but said that since the summer factors weighing on inflation including the international slowdown had changed the likely path of rates.
The governor told the Commons Treasury Select Committee: "The combination of that means the cumulative tightening over the forecast period is likely to be less than previously thought."
He said the UK - which has seen interest rates at an historic low for more than five years and a £375 billion money-printing quantitative easing policy - was "still an economy that requires monetary stimulus".
His remarks come after the Bank's latest report on the UK economy predicted that the changing economic picture meant inflation was likely to fall below 1% in coming months. The governor had also said that Europe was haunted by the "spectre" of stagnation.
The report cemented expectations that rates would remain on hold at 0.5% until the second half of 2015. Mr Carney's comments today indicate that even after this, the rate at which the cost of borrowing goes up will be slower than had been thought.
Lower oil and commodity prices as well as the strength of the pound in recent months, together with struggling wages, have kept inflation low.
With Europe under pressure and growth in China slowing, David Cameron has warned that "red lights" are flashing for the global economy.
Asked about the remarks Mr Carney admitted there was a "heightened degree of external risk" - though he said the picture for the US, the world's largest economy was "somewhat different".
He defended the Bank's prediction for 2.9% growth in the UK economy - more bullish than that of other forecasters.
Mr Carney pointed to increased confidence and a better functioning financial system and said though there were still "issues" for small and medium businesses, there was access to credit for larger firms and households.
Wages were only just starting to improve though households were benefiting from lower food and petrol prices, he added.
But Mr Carney said: "This is still an economy that requires monetary stimulus to grow above trend and bring inflation back to target."
Despite warnings on Europe, Kristin Forbes, another member of the Bank's rate-setting Monetary Policy Committee (MPC), told MPs that the risks from the 18-nation bloc were not as high as during the previous crisis a couple of years ago.
She said: "I think there is less probability of severe break-up with severe negative consequences on the UK as there were two years ago."
Mr Carney declined to be drawn on the "intensely political" question of what effect a clampdown on immigration would have on the economy.
"We don't want to be in the middle of an election campaign in any shape or form," he told MPs.
Asked about whether immigration policy had tightened in the Bank's view, he said: "There has not been a change in policy that has affected the outlook of the MPC."
Mr Carney, who is Canadian, added: "As an immigrant to this country, I am grateful to the open policy."
Ian McCafferty, another member of the MPC, told MPs: "Inward migration can provide elements of skill that are in short supply. Reduction here would therefore lead to an increase in skills shortages."