WASHINGTON (Reuters) - The Bank of England’s next governor praised the U.S. central bank for signalling when it might start thinking about raising interest rates, as British policymakers start to thrash out their differences over following suit.
Financial markets have begun to contemplate the end of the U.S. central bank’s massive economic stimulus, more than four years after it slashed interest rates to nearly zero to fight off the financial crisis.
“I think the value of the Fed’s ... guidance helps a lot with this,” Mark Carney, currently head of the Bank of Canada, said at a Reuters Newsmaker event on Thursday.
“It helps market participants understand not exactly the timing of adjustment of interest rates but the minimum conditions before the Fed even thinks about adjustment of interest rates.”
Carney is due to stand down as governor of the Bank of Canada on June 1 before moving to London to run the Bank of England in July. He declined to comment on Britain’s fragile economy and monetary policy.
One of his first challenges in London will be to find agreement within the bank on how to reply to Chancellor George Osborne, on the issue of Fed-style guidance.
With Britain’s economy stuck in a rut and his own options limited by his austerity program, Osborne wants the Bank to do more to boost growth.
He has asked the bank to report back to him in August on the merits of the steps taken by the U.S. central bank to convince markets that its massive help for the economy won’t be reined in too quickly.
The Fed said in December it would keep interest rates near zero as long as the unemployment rate remains above 6.5 percent and inflation does not threaten to push above 2.5 percent.
Osborne has asked what indicators might work in Britain.
The Bank’s soon-to-retire governor, Mervyn King, has opposed the idea of steering markets on the future direction of monetary policy.
By contrast, Carney championed so-called guidance at the Bank of Canada. The Canadian central bank said in 2009 that it would keep interest rates very low for more than a year, unless inflation picked up, in an effort to persuade businesses and consumers to spend.
But Carney stressed on Thursday that action by central banks alone would not get economies out of a slump.
“They can provide the conditions for growth ... but they can’t deliver the long-term growth that is necessary. That needs to come through true fiscal adjustment and fundamental structural reforms.”
The challenge of getting the bank behind a Fed-style change of approach was underscored on Thursday when another top British parliamentarian expressed concern it could back policymakers into a corner.
Martin Weale, one of nine members of the Monetary Policy Committee, said he was wary about “intermediate targets” other than the bank’s existing inflation target. “Forward guidance, particularly if it’s associated with thresholds, in the British context, does have problems,” Weale told Bloomberg News.
Carney welcomed the expectations of a scaling back of stimulus in the United States as a potentially positive sign about the recovery in the world’s biggest economy.
But he also stressed that central banks needed to proceed carefully with pulling back their help for their economies.
“The tools are there. It hasn’t been done before so I think there’s a need for humility around it and an appropriate caution there,” he said.
Carney was speaking on the sidelines of twice-yearly meetings of global finance leaders at the International Monetary Fund in Washington.
Additional reporting by Chrystia Freeland in Washington and David Milliken and Christina Fincher in London