Mark Carney hints at end of year UK rate increase

Bank of England governor Mark Carney has raised the possibility that the UK central bank could lift interest rates from their record low before the year is out, his strongest hint yet that the bank is moving towards tighter policy.

He said the decision to raise interest rates will come into sharper focus around the end of this year.

Carney spoke of strong momentum in Britain’s economy and described a slowdown at the start of the year as a blip. But he reiterated interest rates would rise only gradually from their record low of 0.5%, and to lower levels than in the past.

Carney’s speech puts the British central bank on track to follow the US Federal Reserve by raising interest rates in the near future, after more than six years at rock-bottom levels amid the fallout of the global financial crisis.

“In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year,” Carney said in a speech delivered at Lincoln Cathedral in east England.

Sterling rose briefly against the dollar as Carney spoke and then slid back. Earlier, the pound hit a seven-and-a- half year high against a trade-weighted basket of currencies as traders bet the bank would raise interest rates early next year.

Carney said there had been a persistent pass-through from sterling’s strength into weak headline British inflation, adding this was “particularly relevant” as the monetary policies of the eurozone and Britain diverge.

British inflation edged down to zero last month, a long way from the bank’s 2% target. But Carney said gathering inflation pressures would become more apparent towards the end of the year as the effect of falling oil prices drop out of the annual inflation rate.

“In the scenario of continued evidence of strong wage growth, and an easing in the exchange rate, one interpretation of ‘around the turn of this year’ could become before the end of this year,” said Sam Hill, economist at RBC.

Carney said the prospects for higher rates depended on wringing out the remaining slack in the economy, which would require sustained economic growth of around 0.6% per quarter.

In the medium term, he predicted interest rates would probably rise to a level about half as high as their historical average of around 4.5%.

Outgoing MPC member David Miles on Tuesday suggested the right level of interest rates, to keep inflation on track and demand in line with capacity, would be around 3% in two years’ time.

Miles, usually regarded as a “dove”, surprised markets by saying it was “likely to be right” to hike rates soon. There is now a strong possibility that August’s meeting could see a renewed split among the nine bank of England rate setters for the first time this year.