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NEW YORK (Reuters) - Britain's economic recovery is on its way to achieving self-sustaining momentum but monetary policy will need to remain exceptionally loose for some time to come, Bank of England Governor Mark Carney said on Monday.
In a speech to the Economic Club of New York, Carney said he was confident monetary policy was gaining traction and that a 'liquidity trap' had been avoided.
But with a heavy overhang of debt, he acknowledged that advanced economies may have entered a phase of low growth and said central banks still needed to deploy a range of policies in a coordinated fashion.
"A recovery may be gaining pace but our economies are a long way from normal," Carney said. "Leverage is still high and weak demand for advanced economy exports could persist for some time."
Against a background of high debt and weak investment growth, former U.S. Treasury secretary Larry Summers said at a recent International Monetary Fund conference that real interest rates consistent with full employment could now be minus 2-3 percent.
Carney said the Bank of England's view was that Britain's equilibrium real interest rate was still negative but slowly moving back towards zero.
"There are other reasons to think that growth itself should bring a supply side improvement," Carney said. "As the economy recovers, investment should pick up and part-time workers should shift into more productive full-time work."
The strength of Britain's recovery this year has taken almost everyone by surprise. After years as a laggard, Britain has become one of the fastest-growing industrialized countries with annualized growth in excess of 3 percent
Carney said providing guidance on the likely path for interest rates had provided reassurance that monetary policy would not be tightened prematurely.
In August, Britain's central bank pledged it would not even consider raising interest rates until unemployment had fallen to 7 percent, something it does not expect to happen for another year at the earliest.
A pick-up in productivity, Carney said, meant interest rates could stay at record lows for longer.
"If supply responds to recovering demand, unemployment will fall more slowly than otherwise and the point at which we will re-evaluate the stance of monetary policy will come later."
Carney said the BoE was vigilant to the risk of unbalanced growth, such as from the housing market, and cited the bank's recent decision to put the brakes on a scheme to help boost mortgage lending as an example of its flexibility to address such issues.
Such measures, he said, would allow monetary policy to remain stimulative as long as needed.
(Reporting by Christina Fincher; Editing by Ruth Pitchford)