Bank of England Governor Mark Carney warned financial markets on Wednesday that the bank would pump more money into Britain's economy if they bet against it and choked off recovery.
In his first speech since taking over the bank, Carney said the recent economic pick-up was broad-based but remained "solid not stellar". He announced a relaxation of rules for banks which could help boost lending.
The initial reaction of investors was muted with market expectations essentially unchanged that the bank will raise interest rates earlier than it has flagged.
Financial markets have challenged the BoE's new plan to keep interest rates on hold for possibly three more years, and Carney spent much of his speech explaining why unemployment was unlikely to fall quickly to the 7 percent level at which the bank would consider tightening monetary policy.
"The upward move in market expectations of where Bank Rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy. The MPC (Monetary Policy Committee) will be watching those conditions closely," Carney said.
"If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further."
Sterling initially weakened but recovered its losses against the dollar and British government bond prices fell after Carney's speech.
Philip Rush, an economist with Nomura, said the comments on more stimulus did not appear to signal any imminent new move.
"Easing is not ruled out if higher rates start to impair recovery but that point does not seem upon us," Rush said. "While higher rates reflect stronger growth, easing would constitute a negative confidence shock - i.e. the opposite of what the BoE is trying to achieve."
The Bank of England spent 375 billion pounds ($582.73 billion) on government bonds between 2009 and last year to try to steer Britain's economy out of the stagnation in the wake of the financial crisis.
Carney said the option of further stimulus was part of the forward guidance plan announced by the BoE earlier this month and which mentioned the possibility of further asset purchases.
He made forward guidance a hallmark of his time running the Bank of Canada before coming to Britain.
Most of the bank's nine top policymakers are opposed to a revival of the bond-buying programme since late last year although it was supported by Carney's predecessor Mervyn King.
And if there were more stimulus the bank would also need to persuade British investors, businesses and households that the BoE can keep its foot on the stimulus pedal for another three years without pushing up already above-target inflation.
That challenge was made all the greater after differences of opinion emerged among the bank's top policymakers.
Martin Weale voted against forward guidance earlier this month. He has since voiced concern about it fuelling inflation.
Carney dedicated much of his speech to explaining why the central bank believed unemployment would fall only slowly, given expected further job losses for public workers and large numbers of part-time workers who want to work full-time.
The BoE estimated only a one-in-three chance of it hitting 7 percent by mid-2015, as markets appeared to believe, he said.
Carney said the BoE remained committed to fighting inflation but it was right for it to allow it to come back down to its 2 percent target only slowly, given the weak state of the economy and temporary factors pushing up price growth.
Carney announced a widening of a planned relaxation of rules on banks and building societies, on condition they meet new requirements on capital buffers.
Under the change, eight major lenders in Britain would be allowed to reduce their required liquid asset holdings - cash and safe but low-yielding investments - by 90 billion pounds if they meet the minimum 7 percent capital requirement, freeing up more money for lending and in turn spurring growth.
In an apparent nod to concerns about the property market heating up again, Carney said the BoE was "acutely aware of the risk of unsustainable credit and house price growth but said gauges of the housing market and household borrowing costs were not at historically high levels.
British house prices are set to rise at their fastest pace in three years in 2013, outstripping inflation and raising concerns that government action may lead to a new price bubble, a Reuters poll found on Wednesday.
Among the risks for the recovery, Carney said a few less well-managed financial institutions still had a long journey to get back to health. He also noted the strain on emerging economies which have seen big outflows of capital back to recovering richer countries and said progress on Europe's debt crisis would remain uneven.