Interest rate rises? 'Getting closer'

The Bank of England governor is trying to ease us gently into the idea of interest rates going up.

by Rachel Savage
Last Updated: 11 Dec 2014

Slowly, but surely, Bank of England governor Mark Carney is warming everyone up to the idea of interest rates, which have been at their record low of 0.5% for 66 months, finally going up.

‘The point at which interest rates... begin to normalise is getting closer," he said in a speech in Wales. ‘Relative to the recent past, the economic outlook is much improved,’ he continued, citing strong growth and falling unemployment.

‘In recent months the judgement about precisely when to raise Bank Rate [sic] has become more balanced… While there is always uncertainty about the future, you can expect interest rates to begin to increase.’

We always knew they were going to have to go up at some point, and economists expect the first rise early next year. But it marks a subtle change in rhetoric from the Canadian, who only last month was confusing everyone with comments over whether rates would rise before real wage growth finally gets going again.

The governor isn’t setting off fireworks just yet, though, trotting out his oft-repeated assertions that any rises will be gradual and interest rates are likely to peak below their pre-crisis norm. He also warned about economic ‘headwinds’, including the housing market (the ‘biggest risk’) and the ‘possibility that financial markets may be mispricing risk’.

‘Demand in our major export markets remains muted. Public balance sheet repair is ongoing. And a highly indebted private sector is likely to be particularly sensitive to changes in interest rates,’ he added.

The issue, though. with all Carney's repetition, is that if he does it too much he might just be ignored, instead of having the reassuring effect he wants.

In a separate interview yesterday, Monetary Policy Committee member Minouche Shafik said rates might have to go up faster if wage rises aren’t matched by improving productivity, which could in turn increase inflation.

So far, MPC members Martin Weale and Ian McCafferty have voted for a 0.25% rate rise two months in a row. But it looks like the rest of the committee are trying to lay the groundwork for when the majority join them.


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