Interest rates in the UK could rise sooner than investors expect, Bank of England Governor Mark Carney has admitted. Base rate has been at a record low of 0.5% for more than five years.
There is already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced, Carney said at the annual Mansion House speech in London.
The speech was prompted by stronger growth and a fall in unemployment, much faster than anticipated.
The announcement was seen as something of a u-turn by economists.
“Throughout his tenure he has sought to convince markets that interest rates would remain lower for longer, but now he appears to be paving the way for a rate rise sooner than expected,” said Ben Brettell, senior economist, Hargreaves Lansdown.
“These first ‘hawkish’ comments have surprised economists and markets, with sterling strengthening close to five-year highs following Carney’s speech.”
Carney added that policymakers have no pre-set course and the ultimate decision will be data-driven. At this point, it is safest to conclude that there remains scope for spare capacity to be used up before policy is tightened and that a host of labour market, capacity utilization and pricing indicators should be watched closely to determine how that slack is evolving.
"And a challenge in deciding when to begin normalising policy is that actual output can be observed but potential supply cannot," Carney said. "That is why the MPC is monitoring a broad range of indicators including coincident ones such as the behaviour of wages and price."
Chris Williams, of online financial adviser Wealth Horizon said that the first interest rate rise will not be as important as the rate at which rates continue to rise.
“We now know there is a strong possibility we will see the first rate rise before Christmas, while last month, the Deputy Bank of England Governor indicated that it might rise by as much as three per cent by 2017,” he said.
“Everyone now has a timeline to be working to. When interest rates rise it can be a signal of an improving economy, however, fixed interest investments tend to suffer and with cash effectively becoming more expensive it can motivate equity investors to review their holdings, potentially taking profit off the table and selling stocks especially with markets at historically high levels.
Carney was not expected to be commenting on the forecast for interest rates, but instead announcing potential policies to control the housing boom in the South East of England.
Alongside Chancellor George Osborne, Carney said the underlying dynamic of the housing market reflects a chronic shortage of housing supply, which the BoE cannot tackle directly. He emphasised that the bank does not target asset price inflation in general or house prices in particular. Carney warned that rapid growth in or high levels of mortgage debt can affect the stability of the economy as a whole.
