Interest rates could begin to rise as early as the start of next year, the Governor of the Bank of England has warned, approximately five months earlier than markets and investors had been expecting.
When rates rise, they will do so over a period of two to three years, Governor Mark Carney has said.
Giving a speech at Lincoln Cathedral to mark 800 years since the signing of the Magna Carta, Mark Carney said that “the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”
Before the speech, markets had ‘priced in’ that rates would begin to rise in May 2016.
Mr Carney said the Bank’s Monetary Policy Committee want to return inflation to its 2pc target “in a sustainable manner within two years.”
On the subject of interest rates, referred to by the Governor as the ‘Bank Rate, he continued: “That means setting [the] Bank Rate to eliminate the remaining slack in the economy, bringing about the sustained increase in costs necessary to achieve overall inflation of 2pc.”
“I expect that this will involve raising [the] Bank Rate over the next three years from its current all-time low of 0.5pc.”
The Governor said that the timing of a rate rise could be swayed by a number of factors including shocks to the economy and global monetary policy.
“Most fundamentally, there are broader macroeconomic considerations, particularly the UK’s large external imbalances. With the largest current account deficit in the advanced world, the right policy mix leans towards tighter fiscal, more accommodative monetary and tighter macroprudential policies,” he went on.
“Given these considerations, the MPC will have to feel its way as it goes…. …There is, in fact, a wide distribution of possible outcomes around any expected path for Bank Rate, reflecting the inevitability that the economy will be buffeted by shocks and that monetary policy will have to adjust accordingly.”
The speech comes two days after Mr Carney told the Treasury Select Committee that an interest rate was getting nearer.
“The point at which interest rates may begin to rise is moving closer,” he said. “Once rates begin to adjust, we expect for those adjustments to be at a gradual pace and to a limited extent.”