THE GOVERNOR of the Bank of England has told the UK to prepare for a potential rise in interest rates this year.
In a keynote speech, Mark Carney said a rate rise “could happen sooner than markets currently expect”, sister title Investment Week reports.
The consensus among economists was that rates would rise in the first half of next year, or even earlier.
Having last year guided people to expect rates to remain at the emergency level of 0.5% until 2016, financial markets had already become more optimistic on growth and shifted their expectations forward, pricing in the first rise in spring 2015.
However, the governor’s Mansion House speech last night to a City audience hinted the first rise could come in 2014.
“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Carney said.
The governor emphasised there was “no pre-set course” on when to raise rates. He said there was more spare capacity in the economy that would need to be used up first before rates move, but added this scenario was drawing closer.
“The need for internal balance – to use up wasteful spare capacity while achieving the inflation target – will likely require gradual and limited interest rate increases as the expansion progresses. The start of that journey is coming nearer,” he said.
He also reiterated the timing of the first rise is less important than the speed at which subsequent increases are made.
“We expect that eventual increases in Bank rate will be gradual and limited,” he said.
Sterling rallied after Carney’s comments, climbing sharply against the dollar overnight to trade at $1.6964 by this morning.