Bank of England (BoE) governor Mark Carney has added fuel to the speculation that interest rates could rise this year after commenting it could happen “sooner than markets currently expect”.
The comments follow BoE policymaker Martin Weale, an external member of the bank’s Monetary Policy Committee (MPC), suggesting that interest rates must rise sooner rather than later in order to avoid shocks. He explained that the longer the BoE waited, the steeper the increases would likely need to be.
Speaking at the annual Mansion House dinner, Carney said, “There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.
“But to be clear, the MPC has no pre-set course. The ultimate decision will be data-driven. At this point it is safest to conclude, as the MPC has, that there remains scope for spare capacity to be used up before policy is tightened and that a host of labour market, capacity utilisation and pricing indicators should be watched closely to determine how that slack is evolving.”
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Carney also noted that the first interest rate increase is “less important than the path thereafter – that is, the degree and pace of increases after they start”. He added that the BoE expected rate increases to be “gradual and limited” because the economy is still facing ongoing challenges.
Interest rates have now been held at a record low of 0.5% for more than five years and it has been suggested that they will begin to rise from the second quarter of 2015. Carney’s comments have led to the pound rising sharply.
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