By David Milliken
LONDON (Reuters) – Bank of England Governor Mark Carney gave his backing for government borrowing to fund infrastructure investment on Tuesday, shortly after Prime Minister Boris Johnson approved a major new rail link between London and northern England
Low interest rates offer the government and businesses the chance to undertake the longer-term investment projects needed to revive Britain’s lackluster growth performance, he said.
Carney, who steps down next month, has increasingly warned that central banks are finding it harder to boost growth on their own, with interest rates close to zero, and that governments will need to do more to boost the economy.
“This is an environment in which, yes, the right infrastructure, the right corporate investment projects make sense and will be necessary in order to ultimately get us out of this situation,” Carney told lawmakers in the House of Lords, the upper house of parliament.
The high-speed rail plan backed by Johnson on Tuesday is predicted to be Europe’s most expensive infrastructure project, with projected costs rising as high as 106 billion pounds ($137 billion), twice initial estimates.
But funding for such investment is cheap, with markets buying 2.5 billion pounds of 50-year government bonds which pay an interest rate of less than 1%.
With a record proportion of Britons already in work and headwinds from Brexit at least in the short-term, future growth would depend on productivity-boosting investment, Carney said.
Finance minister Sajid Javid has said he will focus on infrastructure in the government’s first post-Brexit budget statement on March 11. Britain formally left the EU on Jan. 31, but remains bound by EU rules and laws till the end of 2020.
Carney again indicated that such a budgetary stance could reduce the likelihood that the BoE will need to cut rates to support Britain’s economy, despite it showing zero growth in the final quarter of 2019, since when there have been some signs of a pickup.
“The (Monetary Policy) Committee would have to take into account the stimulus that was potentially provided there in a future decision,” he said.
Carney also played down the likely impact of China’s coronavirus outbreak on Britain’s economy, though he said it was still early days.
On monetary policy, he said BoE forecasts published last month already showed inflation would overshoot its 2% target if the BoE cut its main interest rate, another hint that he did not think a cut would be needed in the near future.
Two of the BoE’s nine policymakers backed a rate cut last month, and external MPC member Jonathan Haskel said that remained his view in a lecture on Tuesday.
(Editing by Gareth Jones)