Mark Carney is running into a problem few anticipated when he took over as Governor of the Bank of England last July. The British economy is doing better than expected.
On Friday, official figures showed that Britain's economic recovery gathered pace in the third quarter, expanding by 0.8 per cent in the three months ended Sept. 30, compared with 0.7 per cent in the previous quarter. That's the best growth rate since 2010.
The stronger economy has become a challenge for Mr. Carney because in August he vowed not to consider raising the bank's key lending rate until unemployment hit 7 per cent. And that was supposed to take until 2016, according to the bank's estimates. With the economy picking up speed and unemployment falling, now down to 7.7 per cent, many economists say Mr. Carney will have to raise rates much sooner.
On Thursday he acknowledged that prospect. "The economy has been a little stronger, which we welcome, more jobs have been created than we had expected, which is also welcomed, inflation has edged down," he told reporters after a speech in London. "The message to households and to businesses is that the recovery has obviously begun, we have strengthened but we are not going to withdraw monetary stimulus until it has really gained that traction." He added that the 7-per-cent unemployment threshold will be "a staging post for when we reassess monetary policy and begin to think about raising interest rates. If we make it there faster because the economy has grown more rapidly, more jobs are being created, we will then make that assessment more rapidly in time."
While joining the chorus of those who say Britain's recovery is under way, Mr. Carney also threw in some caution. "What we're seeing is that the rate of growth in the U.K. is towards the top end of the advanced economies but it's coming from a very low base," he said. Investment is still modest and the export sector "is challenged," he added. All of which makes for a very long climb back to the pre-financial crisis days.
During his speech, in commemoration of the 125th anniversary of the Financial Times, Mr. Carney announced that the Bank of England will make it easier for financial institutions to borrow short-term cash, an indication that Britain's banks are much healthier. "Five simple words describe our approach: We are open for business," Carney told the audience.
Mr. Carney said he was not becoming a cheerleader for London's financial district, known as the City, and that vigorous regulation was still necessary. "Some [critics] ... would prefer that the U.K. financial services industry be slimmed down if not shut down. In the aftermath of the crisis, such sentiments have gone largely unchallenged. But, if organized properly, a vibrant financial sector brings substantial benefits," he said.