Mark Carney stands by forward guidance policy

Bank of Englang governor denies approach on future interest rates is confusing for business or consumers

The Bank of England governor, Mark Carney, has robustly defended his forward guidance policy in parliament against critics who argue it is confusing and has done little to persuade markets that an interest rate rise can be delayed for three years while the economy mends.

Speaking to the House of Lords economics committee, Carney said businesses and consumers understood that forward guidance meantinterest rates would stay low until unemployment falls to 7%, which the central bank predicts will happen in 2016.

Carney said: "A return to growth is not the same as a return to normality", and base rates should remain at the historically low 0.5% level until the recovery was established.

He spoke as the Office for National Statistics revealed that the consumer prices measure of inflation slowed to 2.1% in November from 2.2% in October and was at its lowest since November 2009. The move closer to the Bank of England's government-set target of 2% will give policymakers more leeway to leave interest rates at their record low.

Carney told the committee Britain's return to growth was sufficient to justify resisting calls to increase the quantitative easing (QE) stimulus programme, which Threadneedle Street has held steady for the last two years.

MPs have accused Carney of establishing a highly technical policy of forward guidance that relies on several caveats, or knockouts; this reliance has, they say, undermined the simplicity of the message. Forward guidance includes clauses that allow the bank to push up interest rates should it believe inflation is likely to increase sharply.

Markets have estimated that interest rates will need to rise in 2015 in response to a sustained increase in GDP and higher-than-expected inflation.

Carney said forward guidance had reassured households and businesses that credit would remain cheap until the economy was in better shape.

"Forward guidance is having an effect in the real economy. My experience, having met with more than 300 businesses around the country, is that business people understand forward guidance well. This is confirmed by the reports of our network of agents across the nation," he said.

"What matters most for households and businesses is not market expectations of interest rates, but what actually happens to bank rate now and in the future. That is because the interest rates on 70% of mortgage loans to households and more than 50% of loans to businesses are linked to bank rate."

Lord Lawson, the former Tory chancellor, said he was concerned that the central bank's QE programme to stimulate the economy would be maintained long after interest rates began to rise. He was responding to comments by Carney restating the bank's long-held policy that interest rates should increase before the sale of assets under the QE programme.

Lawson, who wants the bank to start selling the QE programme's £375bn of government bonds, said there was disquiet about the long-term effects of QE, which had artificially forced down the interest rate on government debt.

Carney said interest rates would need to rise to cool the economy ahead of a sale of government bonds.

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