In one of his final speeches before he departs Threadneedle Street in March, Carney said the economy had been sluggish in recent months and that inflation was below the Bank’s 2% target set by the government.
The Bank’s governor, who will be replaced by Andrew Bailey, the head of the City watchdog, the Financial Conduct Authority, indicated that its rate-setting monetary policy committee (MPC) could move to support jobs and growth. It comes amid forecasts that GDP growth in the final three months of the year stalled.
“If evidence builds that the weakness in activity could persist, risk-management considerations would favour a relatively prompt response,” he said.
On the other hand, he said there were tentative signs of stabilisation in the world economy after a slowdown last year, while there had been some signs of a drop in uncertainty in Britain since Boris Johnson’s election victory.
Carney said the MPC would closely monitor the strength of the economy in the run-up to its regular meeting to set interest rates at the end of the month.
Carney’s comments sent the pound to a near two-week low against the US dollar on the international money markets, reflecting a growing expectation among investors for a rate cut from 0.75% to 0.5%. Sterling fell by about 0.5% against the dollar to trade close to $1.30 and was also down against the euro by a similar amount.
Speaking to mark the launch of a workshop at the Bank into the future of inflation targeting, Carney sounded the alarm that Threadneedle Street’s capacity to boost the economy had been increasingly constrained by structural shifts in the world economy.
Interest rates remain close to the lowest levels on record more than a decade on from the 2008 financial crisis, when central banks around the world were forced to reduce borrowing costs and unleash quantitative easing, aiming to boost demand to prevent the last recession from turning into another great depression.
Carney said the level of interest rates required to keep inflation steady would probably need to remain low for a prolonged period, as changes such as rapid advances in technology and demographic shifts held back growth in prices.
“It feels like winter is coming,” he said, adding that central banks faced the risk of a world economy “trapped in a vicious cycle” of low real interest rates and a reduced capacity to stimulate economic growth.
“Deep structural changes in economies are creating disinflationary pressures at a time when conventional monetary policy space is already limited,” he said.
Among options to stimulate the economy in a low interest rate environment, Carney said the Bank could ramp up its use of unconventional policy tools. He said the Bank could double the £60bn package of quantitative easing – buying government bonds from commercial banks – used to pump money into the economy immediately after the Brexit vote in 2016.
He also said the government could alter the rules governing the Bank’s operations to force it to keep interest rates low for longer if required. Carney dismissed calls for the inflation target to be increased above 2%, as well as demands for the Bank to use its bond-buying abilities to fund socially desirable outcomes, such as greater spending on social or green projects – known as people’s QE and green QE.
He said: “Calls for the Bank to solve broader challenges ignore the Bank’s carefully defined objectives. And they often confuse independence with omnipotence.”