Bank of England governor Mark Carney addresses the treasury select committee in the UK parliament yesterday. Carney says the bank will overhaul the way it works with banks and financial markets as it faces criticism over manipulating forex rates. Photo: AP

London - Bank of England (BoE) governor Mark Carney has signalled he was not concerned that Britain’s economy was close to overheating, despite a strong recovery since last year, putting himself in the dovish camp among policymakers.

Speaking to legislators yesterday, Carney said the amount of spare capacity in the economy was probably slightly more than 1.5 percent of gross domestic product, suggesting the BoE could hold off on raising interest rates for longer. Carney also said Britain’s natural rate of unemployment could be less than the bank had estimated, meaning the labour market could strengthen further without pushing up inflation.

Last month the BoE put its assessments of spare capacity in the economy at the centre of its deliberations on when it would raise interest rates from a record low 0.5 percent, where they have stood since 2009 as Britain tries to recover from the financial crisis.

“We ranged in the February inflation report [that spare capacity] was 1 percent to 1.5 percent,” Carney said in comments to the parliament’s treasury select committee.

“I personally would be at the upper end of that range and I would add in the margin, given the most recent employment report, that it would probably be slightly higher than that 1.5 percent.”

UK unemployment rose to 7.2 percent in the three months to December last year, ending a string of falls that had taken the central bank by surprise.

Sterling weakened as Carney spoke. The pound has outpaced many currencies in recent months on expectations that British interest rates could rise before other economies.

In a sign of the difference in views among policymakers on how long the economy can continue its recovery without fuelling inflation, Martin Weale – known as a hawk on the monetary policy committee – said he thought the amount of spare capacity was probably “something under 1 percent”.

Meanwhile, Carney said the bank would overhaul the way it works with banks and financial markets as it faces criticism of its response to signs of possible manipulation of foreign exchanges rates.

Carney faced more than four-and-a-half hours of questioning by legislators, a large part of which was devoted to the bank’s response to allegations that key currency benchmarks had been rigged.

“This is as serious as Libor if not more so because this goes to the heart of integrity of markets and we have to establish the integrity of markets.”

A new deputy governor position, responsible for banking and markets, would be created as part of the shake-up which will be spelled out in detail next Tuesday, he said.

“One of the first tasks of that individual is that he or she will conduct a root-and-branch review of how we conduct market intelligence.”

The BoE said in October, shortly after Carney took over as governor in July, that it had hired consultants McKinsey to advise on a strategic review to reflect the bank’s expanded powers to oversee the banking sector.

The bank has three deputy governors, one for monetary policy, another for financial stability and a third in charge of the BoE’s oversight of commercial banks.

The case for change at the Bank has grown stronger since allegations that staff might not have acted on signs of possible manipulation of foreign exchanges rates.

Carney told the lawmakers that the BoE’s top management moved quickly as soon as it learned of the allegations and it was relentless in its investigations.

The BoE last week suspended an official amid an internal review into whether bank staff failed to flag up signs that foreign exchange traders exchanged client orders to manipulate daily benchmark exchange rates, dating as far back as 2006.

Carney said he and other top officials at the BoE first became aware of the allegations on October16 last year and he told the banks governing board, its court of directors, on the same day.

“We convened governors, we decided to launch an investigation within 48 hours, we retained external counsel and they had begun a very thorough, systematic, relentless investigation,” he said. – Reuters