Bank of England hints at possible rate rise this year

 

Mr Carney emphasised that any increases in interest rates would be "gradual"

The governor of the Bank of England, Mark Carney, has signalled that interest rates may rise this year.

In a keynote speech, Mr Carney said a rate rise "could happen sooner than markets currently expect".

The consensus among economists was that rates would rise in the first half of next year, or even earlier.

BBC economics editor Robert Peston said that although the comments point to an increase this year, any rise "will be small and gradual".

Mr Carney was speaking in London on Thursday at the annual Mansion House dinner attended by City and business grandees.

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Mr Carney may be positioning himself at the vanguard of a hawkish consensus to raise rates early”

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'Gradual'

He acknowledged there was "already great speculation about the exact timing of the first rate hike" from their record low of 0.5%, adding that the decision was "becoming more balanced".

Mr Carney emphasised that there was "no pre-set course" on when to raise rates. There was more spare capacity in the economy that would need to be used up first, he said.

And he also reiterated that the timing of the first rise was less important than the speed at which subsequent increases were made.

"We expect that eventual increases in Bank rate will be gradual and limited," he said.

Speaking at the Mansion House just before Mr Carney, Chancellor George Osborne confirmed plans to give the Bank new powers to prevent the housing market from overheating.

These will include capping the size of mortgage loans compared to income or the value of the house.

The new powers would be given to the Bank's Financial Policy Committee by the end of this Parliament, Mr Osborne said.

He said: "We saw from the last crisis the dangerous temptations for politicians to leave the punch bowl where it is and keep the party going on for too long.

"I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market.

"I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust."

Too much risk

Mr Osborne also announced reforms to planning laws designed to increase the supply of housing. These should provide permission for up to 200,000 new homes, the government says.

The chancellor said the housing market did not pose an immediate threat to financial stability, but that if left unchecked, it may do so in the future.

George Osborne: "There is no immediate cause for alarm"

He said the risks come from homeowners borrowing too much to pay for their houses. This is a problem not just for the borrowers, but for the banks that lend them the money, he said.

There are concerns that when interest rates rise from their current record lows, many homeowners could struggle with their mortgage repayments.

Earlier on Thursday, Business Secretary Vince Cable said he was "appalled" that some banks had been lending five times a mortgage applicant's income, suggesting a "stable level" was up to 3.5 times.

Latest figures from the Office for National Statistics found prices rising at an annual rate of 17% in London, compared with 8% in the UK as a whole. This has led to fears that an unsustainable bubble is developing in the housing market.

However, last week the Nationwide Building Society said it had seen signs that house price rises were starting to cool, while the Royal Institution of Chartered Surveyors said momentum in the housing market was beginning to slow.

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Analysis: Jonty Bloom, BBC Business Correspondent

Mark Carney was headhunted from Canada to be the Governor of the Bank of England.

That is why his speeches are occasionally enlivened with obscure references to ice hockey, moose or, as in Thursday's speech, a rather strained metaphor linking central banking to canoeing.

But it was a much less colourful line in the speech that grabbed the headlines.

The first rate hike "could happen sooner than markets currently expect", he said.

Let me translate from Canadian. Everyone has been betting interest rates won't rise this year. They are wrong.

Until Thursday the consensus was that rates would stay at 0.5% for until at least the beginning of next year and possibly longer.

But the economy is now growing far more strongly than predicted, and that means the Bank is thinking about when to raise rates and calm things down.

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    Comment number 146.

    Interest rates should only rise when we need to cool the economy and inflation. We don't actually have real inflation in terms of people spending far too much money, our inflation is fuel and oil based which raising rates will do nothing to stop at all.

    The recovery is very fragile, if it even is a recovery. Even a signal of intent has seen investors dump housing shares today. Silly Carney

  • rate this
    0

    Comment number 102.

    Whilst the rise in interest rates is inevitable and will be good for savers, the rise should not be allowed to spiral to high as this will surely simply lead to people not spending money and slow the economy down again. It’s a fine balance between the two.

  • rate this
    +1

    Comment number 54.

    It can't stay as it is, those who were highly profligate by taking out massive mortgages and or loans have been rewarded while those who've been frugal have been penalised for their stupidity.

  • rate this
    +12

    Comment number 52.

    It's ironic that I've been saving for my first home with a pitiful interest rate and now that I have a suitable deposit, rates are increasing.

    But, rates will and have to go up, and I've been sensible enough to factor this into my mortgage payments. I wonder how many of those who took up the Help To Buy scheme did the same?

  • rate this
    +4

    Comment number 39.

    about time, people who have morgages have had it so easy savers suffer. It will proberly get the housing market moving in the right direction people who cant afford to keep their home will move or lose it, whilst savers struggling to get together huge deposits will at least get something for their struggles!

 

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