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Carney hints at spring 2015 rate rise

Julia Rampen
Written By:
Julia Rampen

Bank of England governor Mark Carney has hinted interest rates could rise in the spring of next year as the UK economy continues to recover from one of the worst downturns it has ever faced.

The governor told an audience at the Trades Union Conference in Liverpool if the surprising strength of the labour market continues, and inflation does not change course, rates may start to climb in line with market expectations.

Carney said: “Our latest forecasts show that, if interest rates were to
follow the path expected by markets – that is, beginning to increase by the spring and thereafter rising very gradually – inflation would settle at around 2% by the end of the forecast and a further 1.2 million jobs would have been created.

“In other words, we would achieve our mandate.”

Carney said inflation remains relatively benign – CPI came in at 1.6% in its latest reading – dampening the need for a rise.

But he said this may change if the central bank fails to increase interest rates “prudently”.

He added the judgement about precisely when to raise the Bank Rate has become more balanced: “With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer.”

Carney said a rise in wages will suggest the market is close to capacity and that the economy can sustain higher rates sooner.

The precise timing of the first rate rise is less important than the expectation the increases will be gradual and limited, he added: “We are not expecting interest rates to head back to the levels seen before the Great Recession.”

The Bank of England has kept interest rates at the record low of 0.5% since March 2009. In the run up to the financial crisis, the Base Rate peaked at 5.75% in June 2007, before a series of cuts brought it to today’s low.