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Business News

Economic boost puts pressure on Mark Carney over interest rates

Readings will make it hard for Canadian to fulfil his pledge to keep rates on hold until 2016

Record survey readings from all three main sectors of the UK economy in August will make it harder for Bank of England Governor Mark Carney to fulfil his pledge to keep rates on hold until 2016, City economists said today.

“We expect the Bank to be forced into tightening monetary policy well before the date that they are currently suggesting,” said James Knightley of ING. The Markit/CIPS composite purchasing managers index, which covers services, manufacturing and construction, rose to its highest ever last month.

The Bank’s monetary policy committee was meeting today to decide on whether to restart quantitative easing, and its decision will be announced tomorrow. Carney said last week that if UK financial conditions continued to tighten, threatening growth, the Bank would consider injecting more stimulus.

Since Carney made his “forward guidance” pledge of low rates a month ago, money markets have moved in the opposite direction, with traders bringing forward their expected date for rate rises to the middle of 2015.

The pound has also risen against the dollar in response to the flow of strong economic data. Sterling gained further after yesterday’s services survey, rising to $1.5603.

However, Alan Clarke of Scotiabank said the market view on the timing of the first rate rise showed Carney’s pledge was working. “Were it not for forward guidance, we would be seriously considering forecasting a hike next year” he added.