Interest rates must remain low says BoE governor

Interest ratesBank of England Governor, Mark Carney, has called for his successor to keep interest rates low in the UK, arguing that it is essential to the economic growth and revitalization of the banking sector in the future.
Talking in New York, Mr Carney hit back at critics who have called for a premature rise in interest rates and argued that taking any radical course of action now was ill advised considering the huge levels of unemployment and the stagnant growth of the economy.

He also warned that a continuation of current policy was risking a genuine house bubble, and pointed to recent data from the Royal Institution of Chartered Surveyors as evidence of this.

The aforementioned study pointed out that the growth in house prices is now higher than they have been for almost 15 years, with the increase in demand from bank and government initiatives not being matched by a similar rate of house building.

Furthermore, 60% of participating estate agents disclosed their belief that property prices would continue to rise in the next three months, potentially pricing people out of their own areas during the winter.

“This is the highest reading since September 1999 and demonstrates the impact that the recovery in demand allied with anemic 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”, he added.

The issue of a potential housing bubble has been raised by a number of politicians, who have all called for an easing of government intervention in the property market to avoid it ‘overheating’ and pricing out thousands of people in the UK from buying new homes.

This is a sentiment that was reiterated by many on a Treasury select committee last week, with Robert Chote, head of the Office for Budget Responsibility, being one of the few who were present that played down the likelihood of a bubble.

He argued that persistent property price rises might be down to market factors rather than a bubble, and downplayed any potential dangers by highlighting his belief that rising debt would be matched with higher wages, thus enabling households to remain afloat.

However, the Bank of England evidently believes differently, with it being announced last week that their Funding for Lending scheme would be refocused towards small business lending rather than propping up the property market where it was said to be ‘no longer needed’.

It is arguable that with positive action now taken to restore consumer confidence that switching focus is an advisable move that will help prop up another area that is in dire need of help; small business start ups.

‘Long way from normal’

Mr Carney said that a rise in consumer spending and the recent resurgence in the property landscape were both positive pieces of news and had contributed towards the growth of the economy in recent months.

However, he identified that a lack of meaningful exports and the ever faltering banking sector were still things that needed to be addressed if the country had genuine aspirations of sustained and larger levels of 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.

“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.

He has refused to relent on his stance, despite previously stating that he would likely raise the rates when unemployment fell below 7%.

Posted by: Nicola Severn Categories: Finance Tags: , , Comments Off on Interest rates must remain low says BoE governor

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