By William Schomberg and David Milliken
LONDON (Reuters) - Mark Carney, the next governor of the Bank of England, cooled expectations that he would push for big changes in British monetary policy but showed he may bring ideas from Canada with him when he takes over later this year.
In his first detailed comments on the British economy, Carney said on Thursday that making a commitment to keeping monetary stimulus unchanged for a set period of time could be needed to help restore damaged confidence of firms and households.
That is something that Carney introduced at the Bank of Canada, an unusual step at the time but one which was subsequently adopted in the United States, adding to his reputation as one of the world's best central bankers.
But Carney, who will be the first foreigner to run the Bank of England in its 318-year history, used his testimony before British lawmakers to play down speculation that he would rapidly press for bigger changes at the bank. He was also quick to praise its policy of focusing on inflation.
"In my view, flexible inflation targeting — as practiced in both Canada and the UK - has proven itself to be the most effective monetary policy framework implemented thus far," the Canadian central bank chief said.
"As a result, the bar for alteration is very high," the 47-year-old former Goldman Sachs banker said in written answers to questions from a parliamentary committee.
Carney is due to take over at the Bank of England in July, when the British economy is likely to be grinding its way out of two years of almost zero growth.
He said the weak state of the economy would merit monetary stimulus for a period of time but added the Bank of England's current policies might be sufficient.
Carney gave no clear signal that he would push for more government bond-buying by the Bank of England, stressing the risks posed by quantitative easing and research by the Bank of Canada that showed its effectiveness diminished with time.
Sterling rose as investors took Carney's comments to show little sign of looser monetary policy ahead. The pound rose 0.4 percent to $1.5720.
But British government debt prices fell as he kept the door open for a more pro-growth approach in future and said he would consider buying assets other than gilts if required, anathema to the Bank of England's current leadership.
"Some of Carney's comments suggest that he favors some changes in the BoE's policy framework. Nevertheless, we rule out that changes will be abrupt as he sounds very keen on maintaining confidence in the institution's credibility," said Annalisa Piazza, an economist at Newedge Strategy.
Carney was taking part in a question-and-answer session with lawmakers that ran for more than three hours and he made it clear he wanted an early debate on the Bank of England's remit which has not been seriously reviewed since it gained operational independence in 1997.
"Although the bar for change ... should be very high, it seems to me important that the framework for monetary policy -rightly set by governments and not by central banks - is reviewed and debated periodically," Carney said.
Not only does finance minister George Osborne set the policy framework, there is no guarantee Carney could force through change even if he wanted to.
"Whatever Mark Carney says about monetary policy today, he will be one member of nine on the MPC, so cannot dictate policy," former Monetary Policy Committee member Andrew Sentance said.
Other factors out of Carney's control include the British government's reluctance to increase spending significantly and the recession in the euro zone, Britain's main trading partner.
As Carney was quizzed in Westminster, the Bank of England opted to keep monetary policy unchanged with interest rates left at 0.5 percent and no increase in its bond-buying program.
Carney will take over the Bank of England when it is still smarting from criticism that it was slow to act at the start of the 2008-2009 financial crisis and of being burdened by an over-hierarchical culture under current Governor Mervyn King, accused by some critics of acting as a "Sun King".
Asked about his ideal management style, Carney said: "It can't be an emperor, it's more a managing partner."
After taking over at the Bank of Canada in 2008, Carney earned a reputation for protecting his home country from the global financial crisis and he now faces the bigger challenge of getting Britain out of a rut of almost zero growth.
Carney promised to keep Canadian interest rates near zero for about a year in April 2009 as the global crisis intensified, before the idea was taken up by the U.S. Federal Reserve.
That kind of approach has raised eyebrows at the Bank of England. Several top officials have said it is not needed for Britain, in part because of concerns it could stoke the country's persistently above-target inflation.
Asked by the British lawmakers about that kind of communications policy, Carney said central banks "may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up".
However, markets could begin to doubt that kind of commitment if inflation rose above target, he said.
"To 'tie its hands', a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus," Carney said in written answers to questions from lawmakers. "This could reinforce the central bank's commitment to stimulative policy in the future and thus enhance the impact of its policies in the present."
The U.S. Federal Reserve recently set inflation and unemployment thresholds for changing its near-zero interest rates. Carney sounded open to the idea but said any move to such a system in Britain would depend on how quickly the bank would be expected to correct any overshoot in inflation expectations.
He was cool on the idea of setting a higher inflation target than the Bank of England's two percent.
"In my view, moving opportunistically to a higher inflation target would risk de-anchoring inflation expectations and destroying the hard-won gains that have come from the entrenchment of price stability," Carney said.
And he sought to play down previous comments that, in times of crisis, central banks might consider targeting a mix of inflation and growth rates instead of just inflation.
Carney said he was "far from convinced" about such an approach which was branded as radical by British economists and media when he floated it late last year.
(Additional reporting by Huw Jones, Li-mei Hoang, Costas Pitas and Alice Baghdjian; editing by Mike Peacock and Stephen Nisbet)
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