Britain's economic recovery is showing signs that it can reach self-sustaining momentum, but monetary policy will need to remain exceptionally loose for some time to come, Bank of England Governor Mark Carney said on Monday.
Responding to some arguments that rich economies might be stuck in a rut of low growth, Carney said in a speech that he was confident that monetary policy was gaining traction and that a 'liquidity trap' had been avoided.
But with a heavy overhang of debt, he told the Economic Club of New York, central banks still needed to deploy a range of policies in a coordinated fashion.
"A recovery may be gaining pace but our economies are a long way from normal," Carney said. "Leverage is still high and weak demand for advanced economy exports could persist for some time."
Against a background of high debt and weak investment growth, former U.S.Treasury secretary Larry Summers said recently that real interest rates consistent with full employment could now be minus 2-3 percent, meaning central banks would struggle to spur a return to growth.
Carney said the Bank of England's view was that Britain's equilibrium real interest rate - the level needed to get growth back to normal over several years without firing up inflation - was still negative but slowly moving back towards zero.
Carney said momentum in the economy could help to offset the impact of ageing populations and a slowdown in the impact of technology on growth.
"There are other reasons to think that growth itself should bring a supply-side improvement," Carney said. "As the economy recovers, investment should pick up and part-time workers should shift into more productive full-time work."
Warp Speed Risk in Housing
The strength of Britain's recovery this year has taken almost everyone by surprise. After years as a laggard, Britain has become one of the fastest-growing industrialized countries with annualized growth in excess of 3 percent
Carney said offering guidance on the likely path for interest rates had provided reassurance that monetary policy would not be tightened prematurely.
In August, a month after he started as governor, Britain's central bank pledged it would not even consider raising interest rates until unemployment had fallen to 7 percent, something it does not expect to happen for at least another year.
A pick-up in productivity, Carney said, meant interest rates could stay at record lows for longer.
"If supply responds to recovering demand, unemployment will fall more slowly than otherwise, and the point at which we will re-evaluate the stance of monetary policy will come later."
Asked about Britain's housing market turnaround, Carney said the BoE was aware of its dangers.
British house prices rose at their fastest pace in over six years in the three months to November, up 7.7 percent year-on-year, mortgage lender Halifax said last week.
"We're concerned about potential developments in the housing market," Carney said.
He said activity in the housing sector was lower than before the financial crisis, and bank underwriting standards had been "substantially transformed".
"But there is a history of things shifting in the UK and the housing market of moving from stall speed to warp speed and underwriting standards slipping. So we want to avoid that," Carney said.
Late last month, the BoE put the brakes on a scheme to help boost mortgage lending, and Carney cited other weapons in the BoE's policy arsenal to control credit growth.
Such measures, he said, would allow monetary policy to remain stimulative as long as needed.