Low rates may spark reckless borrowing, admits Carney: Bank chief says he is "fully aware" of the risks of the policy

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‘Aware’: Bank of England Governor Mark Carney said he knew the ‘tremendous burden’ that low interest rates puts on the bank

Ultra low interest rates could damage the economy by encouraging excessive household borrowing, Mark Carney admitted last night.

The Governor of the Bank of England also said he is ‘fully aware’ the policy is not without considerable risks, putting ‘a  tremendous burden’ on the Bank as it battles to restore the economy to health.

Speaking at the Mais Lecture in the Cass Business School in London, Mr Carney warned: ‘An environment of relatively low and predictable interest rates could encourage excessive risk taking in financial markets and by households.

‘The period of low and predictable interest rates before the financial crisis was in part to blame for the crisis.’

The Canadian, who succeeded Lord King as Governor in July last year, also said the almost exclusive focus by central banks on inflation in the past was ‘fatally flawed’.

He said that in the years leading up to the banking crisis ‘a healthy focus’ on inflation ‘became a dangerous distraction’ because it ignored threats to the financial system.

Mr Carney said the financial crisis was ‘a powerful reminder’ that low inflation ‘is not sufficient’ on its own to maintain a stable economy.

The Bank slashed interest rates to an all-time low of 0.5 per cent in March 2009 in a desperate effort to stop the recession turning into depression.

Five years of record low rates have spelt misery for Britain’s army of savers who have seen returns on their nest eggs plummet.

But it has been welcomed by borrowers whose mortgage costs have tumbled to record lows.

But with the economy recovering – Britain is among the fastest growing of the developed nations – speculation is mounting over when rates will start to rise.

Rises: Mr Carney has hinted the Bank of England (pictured) may increase rates before the General Election next year

Carney has hinted the first move could come early next year – possibly before the general election in May 2015 – but insisted they will not return to pre-crisis levels of 5 per cent for years to come.

He has suggested the monetary policy committee could raise rates to around 2 per cent to 2.5 per cent in the next three years.

Speaking last night, Mr Carney said: ‘As the MPC has signalled, a low for long interest rate environment will likely be with us for some time.

‘The MPC’s new guidance that any adjustments in rates, when they come, will be limited and gradual helps provide confidence to households and businesses that the MPC won’t take risks with the recovery.’

Inflation has fallen to 1.9 per cent – its lowest level since November 2009 – having been as high as 5.2 per cent in 2011 and above the 2 per cent target for much of the last five years.

The Governor said the Bank is now focused on inflation as well as the health of UK banks and the wider financial system.

He said tools to prevent banks lending recklessly and households borrowing too much can be used to keep the financial system safe.

Such tools, Mr Carney said, ‘may reduce the need for sharp or persistent moves in interest rates which might threaten financial stability’.

Comments (16)

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timster,

hinckley,

1 hour ago

Savers don’t make me laugh. The banks just print more money. Wondered when the next rate article was coming zzzzz

The Red Arrow King,

London,

1 hour ago

Have we not learnt our lesson, reckless borrowing was one of the causes of the recession. Restraint should be put on the banks to stop this happening and I fit does the directors should be made criminally responsible.

Steve,

Watford,

1 hour ago

Reckless borrowing has already happened……you just have to look at the London housing market!

Bill,

Winchester,

1 hour ago

The new method – cut out the boom and go for bust.

Michael Smith,

Mönchengladbach,

1 hour ago

Since when is it ultra cheap to borrow money outside of a mortgage? There are only ultra low rates for savers. Carney knows as much about banking as your average 5 year old counting the contents of their piggy bank.

E-piscopalian,

Celestial, United Kingdom,

1 hour ago

I think he means that we might start behaving like the bankers themselves and end up bankrupt. Or is it the only reason they can come up with to raise our mortgage interest and bank charges to pay for their exorbitant bonuses?

sandwichman,

gloucester, United Kingdom,

2 hours ago

Seems to me that some people want it all ways. They want to purchase properties on LOW rate mortgages over long periods. They simultaneously expect the price of these properties to increase over time at an annual rate of around 3%. Yet, these same people seem to think it their God given right to expect HIGH interest rate returns on their accumulated savings in addition to the increase in the price of their property holdings. So where do they think the money to pay these savings rates is coming from? Out of the sky?

ineedabailout,

londonpavedwithgold,

2 hours ago

I thought a certain Westwood was bonkers, clearly I was wrong!

Rocco77,

Jomtien Thai and London, Thailand,

2 hours ago

Why not link the Base Rate to inflation. If the average inflation rate is 2% then that should be the Base Rate. At least Savers would not be losing money as they are now and would give a bit of incentive to save. Me? I don’t save anymore – not worth the effort.

Spartan,

Manchester, United Kingdom,

2 hours ago

As much as they like to pretend otherwise, things have not changed in two thousand years. The money changers still desecrate everything we call sacred, and its been too long since someone came through with a whip.

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Low rates may spark reckless borrowing, admits Carney: Bank chief says he is "fully aware" of the risks of the policy