The important thing to recognise is that we now have tools other than interest rates that can be used to contain risks in the property and financial sectors. These so-called macroprudential tools were not available to us before the crisis and we are now fully prepared to deploy them if that were needed. The Bank of England is now in a position, for example, to supervise lending to specific sectors more intensively, to make recommendations to banks and building societies to restrict the terms on which new credit is provided, or even to raise capital requirements on mortgage or other types of lending. 6  In June 2013 the Financial Policy Committee concluded that there was scope for banks to reduce their holdings of liquid assets in the near term, and recommended a relaxation in liquidity requirements in order to strike the appropriate balance between achieving resilience and reducing possible impediments to the supply of credit to the economy. That relaxation was subject both to banks meeting the minimum capital threshold, and to additional firm-specific considerations. Today the Prudential Regulation Authority (PRA) has agreed with that recommendation, and is announcing how it will be implemented. The PRA will be making a more detailed statement today and writing to individual firms in due course. 6  BIS central bankers’ speeches  Having these in our toolkit – and if necessary using them – will help us to keep interest rates low to secure recovery without creating risks that make that recovery ultimately unsustainable.
The MPC’s guidance is fully consistent with price stability. I can also assure you of my personal commitment to price stability. I certainly have no hesitation in raising interest rates when required – when I was Governor of the Bank of Canada, we raised interest rates as the recovery there gathered pace. But that was the appropriate policy for Canada at that time. The challenges in the UK today are different, and policy must be tailored accordingly. The Bank of England’s remit recognises that, at times, it is appropriate to bring inflation back to target more slowly in order to avoid unnecessary volatility in output. With a depressed level of output and inflation above target due to temporary factors rather than demand  3  The trend is adjusted for the secular decline in North Sea oil and gas production. BIS central bankers’ speeches  3  pressures, this is such a time. The MPC is charting the right path back to its 2% inflation target. CPI inflation is currently being pushed up by rises in utility prices and tuition fees that do not reflect the underlying pressure of demand on supply, along with the effect of past increases in import prices. Underlying domestic inflationary pressure is subdued, with wages growing at only around 1% per year. Although there will be bumps in the road, inflation is set to fall back over the next two years. In these circumstances it would not make sense to choke off the recovery by raising interest rates prematurely.