Mark Carney says rate pressure might trigger more Bank of England stimulus

The Bank of England may pump more money into Britain's economy if financial markets get ahead of themselves and threaten to choke off its recovery, its governor said on Wednesday.

In his first speech since taking over the central bank, Mark Carney said the recovery was broad-based and looked set to continue.

But he stressed that unemployment would not fall quickly to the level at which the BoE would consider raising interest rates under its new forward-guidance plan announced this month.

Financial markets have priced in a first BoE rate hike in mid-2015, much sooner than suggested by the central bank's forecast that unemployment is only likely to reach its threshold level of 7% in late 2016, down from 7.8% now.

"The upward move in market expectations of where Bank Rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy. The MPC will be watching those conditions closely," Carney said.

"If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further."

The Bank of England spent 375 billion pounds ($582.73 billion) on government bonds between 2009 and last year to try to steer Britain's economy out of the stagnation in the wake of the financial crisis.

Most of the bank's nine top policymakers are opposed to a revival of the bond-buying programme since late last year although it was supported by Carney's predecessor Mervyn King.

Carney said the option of further stimulus was part of the so-called forward guidance plan which was announced by the BoE earlier this month and mentioned the possibility of further asset purchases.

Carney made forward guidance a hallmark of his time running the Bank of Canada.

But he faces the challenge of persuading British investors, businesses and households that the BoE can keep its foot on the stimulus pedal for another three years without pushing up the country's already above-target inflation.

That challenge was made all the greater after differences of opinion emerged among the bank's top policymakers.

Martin Weale voted against the forward guidance plan earlier this month and since then he has voiced concern that it risks fuelling inflation.

Mark Carney dedicated much of his speech on Wednesday to explaining why the central bank believed unemployment would fall only slowly, given expected further job losses for public workers and large numbers of part-time workers who want to work full-time.

The BoE estimated and there was only a one-in-three chance of it hitting 7% by mid-2015, as markets appeared to believe, he said.

Carney said the BoE remained committed to fighting inflation but it was right for it to use its discretion to allow it to come back down to its 2% target only slowly, given the weak state of the economy and temporary factors that are pushing up price growth.

Carney announced a widening of a planned relaxation of rules on banks and building societies, on condition they meet new requirements on capital buffers.

Under the change, eight major lenders in Britain would be allowed to reduce their required liquid asset holdings - safe but low-yielding investments - by 90 billion pounds if they meet the minimum 7% capital requirement, freeing up more money for lending and in turn spurring growth.

In an apparent nod to concerns about the property market heating up again, Carney said the BoE was "acutely aware of the risk of unsustainable credit and house price growth but said gauges of the housing market and household borrowing costs were not at historically high levels.

British house prices are set to rise at their fastest pace in three years in 2013, outstripping inflation and raising concerns that government action may lead to a new price bubble, a Reuters poll found on Wednesday.

Among the risks for the recovery, Carney said a few less well-managed financial institutions still had a long journey to get back to health.

He also noted the strain on emerging economies which have seen big outflows of capital back to recovering richer countries and said progress on Europe's debt crisis would remain uneven.

Carney made the comments in notes for his speech to be delivered to local businessman in Nottingham, in the manufacturing heartlands of England's Midlands region.

He was due to take questions from businessmen and then from reporters after the speech.