Speaking on the eve of a Budget which is expected to show further signs the economy has healed, Carney yesterday outlined the Bank’s wider role following the recent increase in its responsibilities.
Carney (pictured), the former Canadian central bank governor, took over last July with a mandate to modernise the Old Lady of Threadneedle Street and prepare it for its new – and much wider – mandate of financial supervision and regulation.
Yesterday two new deputy governors were appointed, with many other senior officials stripped of their previous roles and given new responsibilities. Among the changes, the Bank of England will get a new chairman of Court, its equivalent of a management board.
Previously the Bank and the Monetary Policy Committee (MPC) had a specific mandate to focus on the 2% Consumer Prices Index (CPI) inflation rate, but now it has a much wider role following the overhaul of the regulation of financial services.
Carney criticised the danger of such a narrow focus on the inflation rate yesterday. “With time, a healthy focus became a dangerous distraction,” he said.
He went on to warn the UK now faces fresh dangers from excessive borrowing, in part caused by the current era of low rates which were cut dramatically by the previous governor to stave off a crippling depression.
Carney reportedly said low interest rates meant the UK was facing “similar risks” to those behind the crisis that emerged in 2008 – as households and businesses feel encouraged to borrow to excess.
“It doesn’t take a genius to see that similar risks exist today,” he said.
The Bank now has a wider role to play in financial stability following the shake-up in the wake of the credit crisis, and Carney hinted there may be other ways to tackle the risks building up rather than relying on interest rate rises.
He said new “macroprudential” powers held by the Bank – which include making sure banks have adequate levels of capital and tools to cool down an overheating housing market – could help, rather than using an aggressive interest rate policy which can have unforeseen consequences.
“That in turn may reduce the need for sharp or persistent moves in interest rates, which themselves might threaten financial stability,” he said.
“Although monetary policy has an important role to play in mitigating financial stability risks, it does so only as a last line of defence.”